Economic cycles
In this way, a cycle in the economic or investment world consists of a series of events that give rise to their successors.
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But eventually something changes. Either a stumbling block materializes, or a prominent company reports a problem, or an exogenous factor intrudes. Prices can also fall under their own weight or based on a downturn in psychology with no obvious cause.
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What the wise man does in the beginning, the fool does in the end.
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First the innovator, then the imitator, then the idiot.
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There’s only one form of intelligent investing and that’s figuring out what something’s worth and buying it for that price or less.
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So the key to understanding where we stand in the cycle depends on two forms of assessment:
- The first is totally quantitative: gauging valuations. This is an appropriate starting point, for if valuations aren't out of line with history, the market cycle is unlikely to be highly extended in either direction
- And the second is essentially qualitative: awareness of what’s going on around us, and in particular of investor behavior. Importantly, it’s possible to be disciplined even in observing these largely non-quantitative phenomena.
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For this reason, it’s important to note that exiting the market after a decline - and thus failing to participate in a cyclical rebound - is truly the cardinal sin in investing. Experiencing a mark-to-market loss in the downward phase of a cycle isn't fatal in and of itself, as long as you hold through the beneficial upward part as well. It’s converting that downward fluctuation into a permanent loss by selling out at the bottom that’s really terrible.
— Howard Marks
References
Mastering the Market Cycle by Howard Marks
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