Book explains market cycle and trends
Most stock-market experts don’t claim that they can predict market highs or lows.
However, one expert investor and writer believes there are ways to understand market trends, and his success in managing mutual funds for Oaktree Capital Group, a company he cofounded, makes believers out of even the most successful investors. Warren Buffett says that if he gets any mail from Howard Marks, it’s the first thing he reads.
Marks has recently written Mastering the Market Cycle: Getting the Odds on Your Side
(Houghton Mifflin Harcourt), and the book has received positive reviews by Buffett, Burton Malkiel, Ray Dalio and other market experts.
Trends are the key
What most impressed these reviewers is Marks’ insight into understanding market trends. If you can predict market trends better, your investment results will improve.
Marks argues that it is very important to be able to predict when to be defensive and when to be aggressive. He believes this instinct is more important than the selection of equities in your portfolio.
If you can do a better job of predicting whether you are still in a bull market, despite small corrections, or in a bear market, in which case you should be defensive and maintain a larger cash position, then your long-term performance will be better.
Lawrence Strauss, a writer for Barron’s, recently interviewed Marks and asked him to expand on some of the points in his book, as well as to comment on the current cycle.
In the interview, Marks indicated that he no longer believes that we are in an “optimistic phase of the market.” He said he couldn’t tell whether we are in the start of another “wobble” in the market or whether it’s the start of a down market.
He does not think that the stock market is highly overvalued. But when Strauss asked whether investors should be aggressive or defensive now, Marks said it is time for defense — though not 100 percent.
Investors should worry more about losing money now, as opposed to missing opportunities. It’s time for caution, he said. He recommended that investors consider mutual funds that have outperformed other funds in down markets.
How to evaluate cycles
In the book, Marks points out the importance of managing risk. He believes that the main determinant of risk is where you stand in the cycle.
His graphs illustrate that as we rise in the cycle — which means that prices are higher relative to values, in general — the probability distribution of future returns shifts, meaning it is easier to lose money.
He also points out that if you buy when we are low in the cycle — which means the prices of stocks are low in comparison to intrinsic value — then it is harder to lose, and expected returns are higher.
He discusses how he determines the cycle we are in by examining many factors, such as how individuals are reacting to news, and how investors obsess over positives and ignore negatives, and vice versa.
He believes that “keeping your emotions under control” is crucial. He goes on to say that all the emotional cues in the investing environment can cause you to do the wrong thing: to buy when things are going well and to sell when things are going poorly, when prices are lower.
A good example is the bitcoin market. When the prices went sky high, many new investors jumped in at exactly the wrong time — and lost a considerable amount of money.
I recommend the book highly. Marks has succeeded in managing mutual funds because he understands market cycles. You will become a more successful investor if you learn how to understand these cycles better.
Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.
© 2019 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.
