Mastering the Market Cycle: Getting the Odds on Your Side
Howard Marks
Houghton Mifflin Harcourt (2018)
How and why “understanding cycles is an essential ingredient in an investment success”
I agree with Howard Marks about the understanding market cycles as well as having the emotional and financial wherewithal to live through them. In the first chapter, he quotes another investor who has enjoyed some investment success: “Warren Buffett once told me about his two criteria for a desirable piece of information: it has to be important, and it has to be knowable. Although ‘everyone knows’ that macro developments play a dominant role in determining the performance of markets these days, ‘macro investors’ as a whole have shown rather unimpressive results.”
Understanding market cycles, therefore, requires investors to concentrate on three general areas:
o Know more than others do about the “knowables”: fundamentals of industries, companies, and securities
o Develop discipline with regard to the paying an appropriate price when participating on one of those fundamentals
o Understand (a) the given investment environment and (b) determine the appropriate strategic position within an investment portfolio
Wayne Gretsky once explained his success playing hockey this way: “Everyone knows where the puck is. I always knew where the puck was going to be.” Marks stresses the importance of tendencies that will guide and inform calibration of an investment portfolio. What about risk? That is, what if investments are not going the way we want? Find out why and then adjust.
The superior investor “is someone whose insight into tendencies permits him to tilt the odds in his favor.” In this instance, they resemble the gambler who knows “when to hold ’em, know when to fold ’em, know when to walk away, and know when to run.” Remember: “Ev’ry gambler knows that the secret to survivin’ is knowin’ what to throw away and knowing what to keep.”
These are among the dozens of passages that caught my eye, also listed to suggest the scope of Marks’s coverage:
o Elements of cycles (Pages 18-19, 25-27, and 208-210
o Understanding cycles (22-24 and 314-315)
o Causation and progression (30-32 and 297-298)
o Investment psychology (40-42, 93-94Z, 186-188, 190-191, and 214-215)
o Economic cycles (46-47 and 64-66)
o Long term trends (48-51 and 63-64)
o Inflation management (68-70)
o Impact of emotion on economic cycles (83-86, 97-99, 289-292, and 298-299)
o “The Happy Medium” (86-87, 90-91, and 116-117)
o Fear and/or greed motivation (87-89, 92-93, 221-222, and 223-235)
o Attitudes toward risk (105-107, 110-111, 114-119, 126-132, and 134-135)
o Warren Buffett (125-126)
o Workings of credit cycle (141-142, 157-160, and 304-306)
o Bull market stages (191-193)
o Bear market stages (193-196)
o Capitulation (194-195)
o Internet bubble (217-222)
o Aggressive or defensive investing (250-253 and 259-260)
o Skill or luck investing (253-254, 258-259, and 272-273)
o Peter Bernstein (268-269)
I am deeply grateful to Howard Marks for providing so much valuable material. The information, insights, and counsel in Mastering the Market Cycle may not, in fact, enable everyone who reads it to “master” the market but this material can enable a reader to gain a much better understand the cycles that usually determine the success or failure of investments in that market.