THE FUTURE OF CYCLES – 17 – MASTERING THE MARKET CYCLE

Cycles in economies, companies, and markets

If we follow above points mentioned by Mr.Howard Marks then definitely we can take advantage of market cycle and able to generate above-average return.

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “HAVING A SENSE FOR WHERE WE STAND”

The above link will help to understand how good news flows and media get crazy with higher index targets. In the above link I have compared 2017 with 2007 and given indication in 2017 for the upcoming bubble.

Nifty 12000 – Here, we can see that the media start celebrating when the market has approached new high. Such acts motivate to retail investors and that will lead to more market participation.

We can get an indication of the market bubble when we observe our surroundings.

Investors try to predict bottom and still in the Fear Of Missing Out (FOMO). I am getting calls from many of people who are unaware with market, own little knowledge of market but tend to predict stock moments. They approach me with catching bottom, ask for advice (not actually, they want to get confirm with me) that they should invest right now otherwise they will miss out current opportunity.

People are involved in any of the decision-making processes whether it is in the economy, investing world, or anything else. So those human emotions also getting involved in the process. This resulted in more euphoric behavior at the wrong time and more desperate behavior at the wrong time by people. That will have resulted in the cycle. If the machine involves in the economy then it will not have a cyclical move.

The market has never moved in a straight line in the past and never will be in the future. So that we need to understand the cycle and need to take benefits from it. People think that excess bull or bear remains but that excess behaviour has to correct and that will have resulted in the cycle.

We can keep journal for events happens to our surrounding, major corporate deals, the behavior of people with us knowing that we are an investment professional, hot sectors which attracting major participation, junk starts flying, innovation in valuation matrix, etc. We cannot predict when the bubble will burst, but we can save ourselves from getting burst during bubble takes a journey towards burst. When we initially prepare ourselves for the upcoming bubble – burst then it will be going to happen that others will consider us a fool but we should accept being a fool rather than face huge damage to our wealth.

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

Don’t confuse brains with a bull market – 16 – MASTERING THE MARKET CYCLE

When there is unusual profitability, higher return ratios command by a business then such businesses attract the incremental capital from others. This incremental capital results into the stiff competition and particular business become crowded where such unusual profitability and higher return ratio gone for a toss.

Reversely, businesses which are not able to generate huge profitability, higher return ratios, huge capital requirements etc. then such businesses fail to attract the attention of the new capital so that fewer players remain in the industry and due to challenging business environment, those few also reduces. This consolidation results in moving a cycle of profitability and return ratios to the improvement level.

Examples – high profitability and return ratios become lower (Telecom) and

Merely 2-3 telecom operators to ~14 telecom operators and then again reach to strong 2 telecom operators. This journey suggests the rise and fall of companies.

lower profitability and return ratios become higher (Paint)

So that we need to understand that business does not grow to the sky. They all have a cycle. Also, we need to keep in mind that best investors do not get successful all the time. Our human nature makes our success and that also moves in a cycle.

Success changes the people and they start thinking that they are smarter. Success has a negative consequence also where people become richer and motivation level of them started reducing. Unconventional thinking transforms into conventional thinking. Rather we should know our limitations and also, need to understand that we can fail though we become successful investors.

Successful investors believe that they are mastered in the investing and they have less self-doubt, the worry about being wrong and risk of losses. This invites the risky situations.

We have to keep in mind that – “Don’t confuse brains with a bull market.”

Success teaches us to make money and failure teaches us an important of the risk aversion. We always have to focus on risk while balancing between the aggressiveness and defensiveness. When there is a bull market, everyone gives us a piece of advice. But the quality of advice getting checked during the bear market only.

Making money in the market is always an easy task but keeping secured that earned money is a difficult task.

We keep doing hard work and keep learning for achieving success in the investing journey. One success does not make us a successful investor.

If we have earned an Rs.100 cr but we do not have the skill to keep it secure then it will not take time to again reach at zero.

We have seen that when the asset is not accepted by the crowd and all are uncomfortable to hold then the particular asset will be available at a bargain. Similar to us, when we start getting popular, everyone wants to make contact with us, everyone accepts our thoughts then we will not be available at a bargain. We also become crowded. We have to keep ourselves grounded and keep reminding ourselves that no rule, no strategy will work forever.

When risky assets are penalized by the market and due to that, it will be available at the valuation where it will be no riskier.

When there is a monopoly of the business, business generating good return ratios, decent profitability etc. These invites a competition, these plants a seed of failure. Reversely, when everything seems to be worst, then seeds for success getting planted.

Examples – monopoly kind of business worsening due to competition (Auto OEM) and

Competitive business turns out to be good (Footwear)

We believe that a good time will follow more good times but actually, we forget the cyclical nature of everything especially success. So that good time itself having a seed for the bad time and bad time itself having a seed for the good time.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

LIMITS ON COPING – 15 – MASTERING THE MARKET CYCLE

We have seen superior results with superior insights. But for getting these skills, we also need to know the limitations and how difficult it is to acquire them.

If we are going to identify what will be going to happen tomorrow or the day after tomorrow or next week, next month then we are not going to get success in identifying cycle. Identifying cycle is never easy, it requires a greater effort to capture a cycle in a better way which provides us with an advantage.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

CYCLE POSITIONING – 14 – MASTERING THE MARKET CYCLE

It is always important to be defensive and aggressive over a different period of time. We cannot be defensive for every time or aggressive all the time. The most important is when we should become defensive and when we should become aggressive, it matters a lot. If we become defensive at the bottom of the cycle and aggressive at the top of the cycle then it will be dangerous for our wealth.

We require aggressiveness, timing and skills for achieving success. Aggressiveness at the right time creates a fortune.

For getting success, we have to focus on key elements mentioned by Mr Marks.

• Risk in our portfolio in the cycle, which assets we are holding in the portfolio and among those which are overweight or underweight.
• Aggressiveness such as holding second-grade assets, leverage, macro dependent investment, putting more capital at risk. Defensive investment such as holding cash than securities, safer assets, avoid leverage. Selection from above both depends on where we stand at the cycle and what can be a future market development.
• The skill requires to make a balanced decision. Luck required when randomness has more effects on the events. Skills help us to make a decision in the portfolio but luck can fail our right decision or proven to succeed in our wrong decision in the short run. Skills win the battle in the long run.

When we found that we are positioned in the cycle where pessimism at lowest, the economy has better development, etc. and we have become aggressive towards portfolio positioning then it will reward us with greater profits while the market does well as per our assumption. And also incur losses if the market does not work as per our assumption.

Being right is not into the control of anyone due to the involvement of randomness and luck factors.

When we found that the economy started being optimistic, the psychology of investors started optimistic, good news started flowing then we need to cut position in our portfolio which we feel overpriced. This effort helps us to reduce risk when slowdown or recession occurs. But this decision requires a skill set otherwise we will underperform the market at whole.

We always have to keep in mind that when the market is low in the cycle then the probability of losses is low and the probability of making profits is higher. Reversely, when the market is high in the cycle then the probability of incurring losses is higher and the probability of making profits is lower. We cannot predict the outcome but we can take advantage of the cycle by making an assumption of it.

After identifying the market cycle, we need to make a selection of the assets. If the price of the asset is lower compared to its intrinsic value then it will do better than other assets. And if the price of the assets is higher compared to its intrinsic value then it will not do much better than other assets. We also should focus that whether the intrinsic value of the assets has scope for further growth or not.

Theoretically, it quoted that the market is efficient and all the information is available with everyone so that no one can make profits from it. But reality shows something different. It shows that few people can think differently from the crowd and get above average than all. This is called second-level thinking where we need to think wise and differently from the crowd. Those who use second-level thinking they can do above average than consensus. This is key to assets selection.

Winners have a tendency to fall less than the market and during the rising market, they meet the market. And those who do not have a skill, they fall more than the market and does not have a higher return when market raises.

Aggressive investors with superior insights, fall slightly more than market in falling time but raise more than market in good time. Whereas defensive investors with superior insights, outperform in the worst time and underperformed the market in good time. We need to keep a balance between both. The person who can make a balance between both aggressive and defensive with superior insights, that investors outperform the market at the worst time as well as in the good time also.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

Checklist about market cycle – 13 -MASTERING THE MARKET CYCLE

We cannot predict the future and cannot see the future so that can we prepare for the future? How can we be positioning our investments? Answers to these questions lie in the understanding of the cycle and at where we stand at the current cycle.

It’s not always what we buy that matters but at what price we are buying that matters a lot.

These checklists help us to an understanding regarding cycle and where we stand at the cycle. That understanding helps us with what we should do and what can be the portfolio positioning. These checklists also help us to remove some mistakes such as buying little when risk is low so that capital allocation decision also can be improved. The capital allocation also one of the key elements to becoming a successful investor.

We all see the everyday events which were covered by the media but we also need to put effort to understand that what it is going to indicate to us. These efforts help a lot to us. I got saved in recent market turmoil due to understanding of the cycle which I have practised after reading “The Most Important Things”.

I want to quote my learning from the most important things here to explain this concept with a few additions.

The earlier scene in the year 2017-18

The current scenario in the year 2019-20

We need to focus on the current scenario what it is indicating to us, not to worry about the future. If the current scenario tells us to stay away and we are into the third phase of the bull market then we need to adjust our portfolio accordingly. And if the current scenario suggests the third phase of the bear market then we need to adjust our portfolio positioning accordingly. We cannot track each and every information flowing around the world but we need to understand which of them are important and help us to reach the conclusion.

When market and psychology of the investors flying then do not care for the valuations. People argue that old valuation techniques do not work in the current period. Another argument is that we should look at the business, not stock so that valuation does not matter. But what happens to this logic when bear take a charge?

Old technique again starts taking place. Higher P/E looks as an unhygienic for the health of the portfolio and low P/E tempted to the investors.

We can see that during the bull period even non-qualitative companies also traded at the multiple of quality companies.

There are qualitative and quantitative two phenomena which we can study to understand where we stand in the cycle. We always need to ask the question to ourselves how the assets priced and how the investors around us behave? That means the quantitative part refers to the valuation of the assets. And qualitative part refers to the behaviour of investors around us & understand it.

Example – one of the E-Commerce company of India

When the market is booming, the psychology of investors is positive, economy growing, people are eager to make an investment then low-quality securities also getting issued by providing a better rating.

We have to be contrarian, have to learn to go against the wind prevailing in the market.

When market falling, people tend to stay away from it. They argue that keep away from catching a falling knife. But when dust gets settled and we realize that the final bottom has made, a bargain will also be gone.

There is no way to know when and at what price exact bottom has made. We come to know about the bottom only after it has made.

We should avoid buying with leverage money because when pendulum moves towards extreme pessimism then we cannot able to know where it will stop and we get a margin call, due to the leverage. We get a disastrous outcome of such an act.

John Maynard Keynes is reputed to have said: “The market can remain irrational longer than you can remain solvent.”

When the economy is in a troublesome period and investors psychology also negative then only, we get a good asset at a bargain price.

We have a two-risk scenario – one is a risk of losing money and the other one is a risk of missing out an opportunity. Investors have to make a balance between the risk. When market moving higher in the cycle, we have to focus more on the risk of losing money and when market-moving lower in the cycle, we have to focus on the risk of losing the opportunity. When there is a high chance of losing money then we have to play defensively and when there is a chance of missing out an opportunity then we need to play aggressively.

The cycle is going to happen and how we respond to it is the key matter. Successful investors are those who have survived under the different market cycle and that cycle makes them more thoughtful.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

INNOVATOR, IMITATOR, AND THE IDIOT — 12 – THE MARKET CYCLE

As an investor, we have to deal with the prices of assets and evaluate where currently its standing and what can be in the future. Prices of assets are getting affected by fundamental and psychology.

Psychology of the people does not remain the same forever. It will change for any of the reasons for millions of reasons.

Rising prices of the assets make investors’ psychology in the optimistic area and falling prices of the assets make investors’ psychology in the pessimistic area. The reason and result for the occurrence of the cycle do not remain the same with all the cycle but it is sure to a repetition of a cycle. Performance numbers are already recorded and sometimes, we require skill to understand it thoroughly. This is a past and we are not able to predict the future. It is essential to roughly think about the future to protect our investment. Second-level thinking also help us to understand the psychology of the market participants and act according to our conclusions.

There are few factors which influence and force cycle to occur.

Confirmation bias where investors seek for a piece of information or events which supports the thesis or not.

The tendency toward non-linear utility where we value a money loss is far greater than money made.

The gullibility is which influence the investors to swallow tales at good times which have the potential to gain at a good time and the excessive scepticism that makes them reject all possibility of gains in bad times.

Risk tolerance and risk aversion which investor ask for risk premium for the incremental risk.

Herd behaviour indicates to act with keep in mind that what the other people are doing.

One of the highly influential bias is to see other people making money with the idea which we have rejected initially. We do not resist such situations and left with the buying those assets which resulted in a boost to the asset bubble. Also, we generally do not select an unpopular idea and prefer to go with the herd.

All such biases lastly transform into the greed for more, envy of the money others is making, and fear of loss.

A bull market where prices of assets risen, rising or will raise and bear market where prices of assets fallen, falling or will going to fall.

But there are three-phase of the bull market –

In the first phase, growth and better improvement are invisible to most of the investors. Because it does not have a huge price appreciation, also occurs after the crash, wipeout of the prices has affected the psychology of investors.

In the last phase, prices of assets have risen, improvements are visible & started a long back. This improves the mood of the market and investors where they are ready to pay any price for the assets.

It is obvious that those who buy assets in the first phase, those got assets are at bargain prices and the probability of making money is huge. Whereas those who buy assets are at last phase then assets are available at costlier prices so that probability of losses are higher.

 “What the wise man does in the beginning, the fool does in the end.”

Warren Buffett has said much the same thing even more concisely: “First the innovator, then the imitator, then the idiot.”

As we have seen three phases of a bull market, there is also a three phases bear market.

We have to see the problem behind the scene. Because an excess of good things always invites trouble. And an excess of pessimism gives birth to the new era of optimism. We need to focus on each little thing happening into the surrounding which helps us to recognize problem or opportunity earlier than others.

People always get pain when they see others are making money so that they fear continuing of trend and they will miss out on an opportunity. Thus, they also join the trend. Such influence affects the investors who have rightly enter at the first phase and by affecting the psychology, they again enter the last phase where they involve doing the wrong things. The most brilliant person also can fall under such psychological influences.

We also have to understand that the bubble is not always where the market raises and also not bust where the market falls.

If the company is good in quality then also it has taken around six years to reach the same price but if assets are not good quality then it gets disappear after the bubble get burst.

No assets are good enough that it will never be going to become overvalued. Price does not matter and borrowing money to make an investment are a sign of building a bubble. I have met a few of the people who take a loan on credit card, use credit period to trade in the market. Such is a sign of the bubble. This was an incident of late 2017 and starting of 2018.

We can see that good news, maximum availability of the credit, maximum optimism in psychology, maximum prices, minimum potential returns, etc. All come at the same time, which is a signal for the identification of the bubble.

Reversed to the top, the bottom has an inability to get credits, falling in the asset’s prices, maximum pessimism, bad news flows, minimum risk.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

THE REAL ESTATE CYCLE – 11 – MASTERING THE MARKET CYCLE

We have seen the financial cycle in the post of the credit cycle. Similarly, Real Estate also follows the same cycle as all the financial cycles follow, except one that real estate having a higher lead time to development takes place. Generally, real estate projects take a huge time to get constructed to get commercializes.

When the economy is bad at that time credit will be unavailable for the construction work and when time is a good credit will available easily. This impact on the real estate cycle. Better economic time causes an increase in demand and bad economic conditions led to a fall in the demand. Due to the higher lead time, supply & demand mismatch takes place which causes the rise in the rent and the sale price.

When projects got halted due to the credit unavailability then these situations invite a bust in the Segment. That will cause a fall in the price of buildings. Investors can get land less than what developers have invested in. Also, here, lead time reduces as approval got finalised in good time. It hurts to the projects of which construction started in the boom period.

When there is a demand for home and financing options available, builders decide to build a home and all builders decide the same which creates a surplus of home. Also, due to long lead time, demand gets soften then builders left out with the inventories which he has to sell at lower than the expected value. But the reverse of it, when the economy is slow, availability of finance is low and pile-ups of unsold inventories so that builders stop building a new home. This helps to slowly getting sold out of inventories. Now, when the economy revives again, at that time supply will be lower than the demand which brings prices to the upper level. So that building a home during the slowdown is a better way to reap profits.

People tending that real estate investment beat the inflation (same for common stocks) but we need to understand that if the price which we pay are too high then it will not beat inflation and in result, it will beat us.

If we have bought real estate during a high price growth then we have to wait a little more while price growth has been slowing and many of the area it has been degrowth. So that not all price purchased of real estate result into the wealth creation.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

THE DISTRESSED DEBT CYCLE – 10 – MASTERING THE MARKET CYCLE

Mr Marks has mentioned that he has focused on the distress debt companies where he selects the company which is operationally well but having a debt-laden balance sheet. Means company has to work on reducing debt which will bring value creation for shareholders.

So that we have to analyze thoroughly to identify the value of the company and at the end of resolution what we rewarded. If after resolution amount worth higher than the currently available debt securities price then we should buy those securities. This is difficult to play in India but we can play such where a business does not have a much problem but due to some problems the company has brought debt. When the company started paying debt, we can look into it. One of the air-cooler company has a track record of success in such a strategy.

Example of failure of this strategy in India – One of the Jewelry company in India

If we see the above balance sheet then we can see that inventories of the company were higher than debt. If the company liquidate its entire inventories and pay the debt then also the company remains with excess cash. And company available below that value.

As we have seen in the credit cycle that when credit is easily available then everyone goes for it with the compromise on the standard. But when the economy starts to contract at that time, credit availability becomes tough so that debt-laden companies cannot able to refinance their existing debt. This incident brings them at the event of bankruptcy and that hurt the psychology of investors. Selling of the debt securities starts and prices falls as everyone starts avoiding it.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

09 – THE CREDIT CYCLE – MASTERING THE MARKET CYCLE

A good company does not need to always remain a good investment. We have to focus on the good deal which has a good price with limited risk and potential for return is substantial.

Changes in the availability of the credit create a fluctuation among the economic activities which tends to have resulted in the economy and profits cycle. The credit cycle has an immerse important for economic development. Corporates require additional capital to grow further and unavailability of capital make it hard for them to grow.

Similar situations we have experienced recently with the financial companies where they have brought short term borrowings to support long-term lending. And their failure to the repayment of short-term borrowings has created a crisis.

The occurrence of the credit cycle

This leads to again starting the same cycle. It takes time to complete the entire cycle but it will complete for sure.

As the Economist said earlier this year, “the worst loans are made at the best of times.”

Reduction into the money supply into the economy has led to liquidity crisis and slowdown into the economy.

Money is also a commodity as other commodities so that when the competition starts getting increased, financial institutions have to make availability of money at cheaper rates. This brings down the margins of the financial institutions. Cheaper money invites to more borrowers and borrowing without discipline resulted in the huge negative consequences. When anything easily available then we do not value it particularly and that leads to destruction.

We cannot predict the time and the extent of the cycle but sure enough that cycle will going to occur and also, we can say that we are either near to occurrence or not.

It is difficult to take a call on the economy while investing but we can keep track of the supply/demand picture relating to capital. For knowing where we stand in the cycle, we need to track the credit cycle. Mast bull market getting inspired by the availability of the credit without any care for the future consequences. And the most bear market is the result of the unavailability of finance for the different projects.

When margin calls hits for the levered firms then they were forced to sell their assets or need to bring additional capital to survive. Such period forced people to sell debt securities and that will have resulted in the lower prices of debt securities. At such a lower price, yield becomes so attractive that investors can start taking buying position on it.

When we see an environment like fear of losing money, unwillingness to lend and invest regardless of merit, shortages of capital everywhere, economic contraction and difficulty refinancing debt defaults, bankruptcies and restructurings, low asset prices, high potential returns, low risk and excessive risk premiums then it is a natural time to start investing.

So that when we see these events then we have to be ready to be cautious because these events invite an increase in debt level, issuance of unsound & overpriced securities etc. These all become a starting step of a bust. When the credit cycle is in an expansion phase then we have a huge issuance of the securities that means people accepting new issuance. But extensions of it in the way of unsound & overpriced securities. Also, we heard stories like next Infosys, next Microsoft, management performing like Warren Buffett, etc. etc.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

8 – THE CYCLE IN ATTITUDES TOWARD RISK – MASTERING THE MARKET CYCLE

In a good time, people do not care for the risk. They believe that they will be able to generate a good return by taking additional risk. But what happens when bad time comes? Does this behaviour remain the same? No, in bad times, people change their focus on protecting wealth rather create it.

Investing means to build a portfolio position in a way that future development helps the potential profit generation.

But do we predict the future? Someone believes that they can. Since (a) investing consists of dealing with the future but (b) the future isn’t knowable, that’s where the risk in investing comes from. If we can accurately predict the future then would not be investing becomes so easy and everyone can perform it in a better way?

We do not even know what is going to happen with us in the coming few moments, then how we can predict the future of the corporate earnings and economy accurately. It is just a probability of occurrence of the events. The event may or may not occur, and if occurs then may not be on the time at where we have predicted. For becoming superior investors must have to understand, assess and deal with the risk. And without dealing with the risk, we cannot become a superior investor. It’s an essential element of investment success. How we behave with the risk is to decide investment success.

It is overstated that the more you take risks, the more return you get. But if we take the higher risk then the outcome might be in lower or higher potential return. The concept should be, higher riskier investment should produce a higher potential return otherwise nobody will be going to invest in the particular assets.

 BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “UNDERSTANDING RISK”

If two investment avenue promises similar returns with differences into the risk scenario then we should choose the lower risk with assured return. Treasury bond and any other investment both promises same return then one should go with treasury investment.

Due to our risk aversion towards stocks, we remain careful while studying companies, keep a margin of safety, appropriate sceptical towards analysis, conservative to assumptions. For successful investing, we all need to focus on mentioned factors but not all perform these tasks and if perform then not every time.

So, investors demand incremental returns forbearing of incremental risk. But when positive scenario plays out, people become less risk-averse than what they should. Now, they put less effort and less caution for performing an analysis. Not careful with a margin of safety, not demanding for the risk premium and resulting in it, prices of risky assets raise more compared to less risky assets. These reduce the incremental returns for the bearing incremental risk. The most unwise investment made during the good time rather in a bad time.

Cycle

So, the risk is higher when everyone feels that risk is lower. And the risk is lower when everyone feels that risk is higher. It’s all about temperament, comes with experience, no educational courses can teach it.

 Example – Maruti Suzuki – everyone bullish when marketing goods, majority of research reports indicated per capita car in India compared to others nations such as China, USA etc. but what happen when the euphoria has been wiped out then everyone has a threat of EV, disruption of business. We have to think that the country is the same, opportunity is the same. The scenario only changes from over-optimism to pessimism, liquidity has dries.

Cycle

Just as risk tolerance had positioned them to become buyers of overpriced assets at the highs, now their screaming risk aversion makes them sellers— certainly not buyers— at the bottom. Here, people realize that they have made a mistake in selecting investment Avenue, selecting a particular stock, missed a few points in the analysis, etc. etc. But when the bull phase enters, they always made similar kind of mistakes which they realized during the bear phase.

We generally take more risks when we should avoid or behave in a risk aversion. And we behave risk aversion when we should take an incremental risk for incremental returns. We need to balance between too much and too little.

Such extreme behaviour tends to work as a cycle in the market.

Risk arises when prices of the assets reaching towards high and started getting vague investment rationale to justify such a high price.

If we want to save ourselves from the carefree market situation then we have to accept the lower comparative return during the carefree market scenario and have to look like an old-fashioned investor. This is only a way to save our reputation and wealth.

I have experienced the same in my investment career. I have mentioned many times in the past articles that I remain in huge liquidity position since the mid of 2017, and this has given me much rough and sarcastic behaviour from people. But now, they have lost their major part of the portfolio and I am searching for a good investment opportunity with a flat portfolio.

When a negative situation prevailing in the market, people tend to become more and unnecessary sceptical, they show risk-averse behaviour about the investment which they did not perform during the boom period. Such behavioural bias left them with a lower return with incremental risk. During the boom period, people have a fear of missing out an opportunity and during the negative period, they have a fear of losing the capital. When people have to show a risk-averse behaviour, they show a risk-tolerant behaviour and vice-versa.

We always need to check; how much positive news is discounted into the price? Whether upcoming positive events already discounted into the price? Higher price compared to the intrinsic value left with a lower margin of safety. We have to be sceptical towards the decision making but sceptical in pessimism environment is for optimism and sceptical in the optimistic environment is for pessimism.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks