On market cycles

The market does not repeat but it does rhyme. In other words, the concept of cyclicality repeats. The reasons for it, the details and the timing vary from cycle to cycle.

First of all the economy is cyclical. Sometimes we have prosperity and recovery and sometimes we have a recession and slowdowns.

Number two, there is the business cycle. Companies are what we call leveraged. They have some debts and they have fixed facilities that can’t be adjusted so companies’ results fluctuate more than the economy itself and then markets fluctuate much more. Why? Because they are created and operated by people.

Now, as long as you are in a country which is on a growth curve, the net of that over a long period of time will be positive. So you can buy a good quality asset that produces cash flow at a reasonable price, ignore the cycles and if you hold it long enough, expect to make money.

If your emotions make you the victim of cycles then you end up buying high when you are feeling good, selling low when you are feeling bad. You will lose a lot of money that way. It will be better to have bought and held.

On the other hand, if you are astute and unemotionally enough, you might be able to buy low and sell high.

My personal investment philosophy says that risk control is really the key. One of our rules is we don’t know where we are going but we ought to know where we are. If we can assess where we are in the cycle that has certain implications for what’s next.

Cycles will always be part of investing. Even if you are successful in the long run, you’re subject to vagaries in the short run. Emotions and short-run vagaries will turn it into a disaster.

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