Howard Marks of Oaktree Capital Management is famous for his memos. In this thread we will go through one of his memos : “Mastering the Market Cycle”
cc:@SteadyCompound @EugeneNg_VCap @MoS_Investing @InvestmentTalkk @FromValue @UKInvestGlobal @TSOH_Investing @frankinvesting
cc:@SteadyCompound @EugeneNg_VCap @MoS_Investing @InvestmentTalkk @FromValue @UKInvestGlobal @TSOH_Investing @frankinvesting
Why are there cycles ?
We know that the US GDP grows on average 2%. But we know that it doesn’t just grow at 2%, it is sometimes 1% and 5%.
Why does this happen? Why is the average not the norm.
This is because the positive trends eventually go to excess, and those…
We know that the US GDP grows on average 2%. But we know that it doesn’t just grow at 2%, it is sometimes 1% and 5%.
Why does this happen? Why is the average not the norm.
This is because the positive trends eventually go to excess, and those…
excesses eventually correct on their own or are corrected.
So it is better to think of cycles as excesses and corrections and not up’s and downs.
Why do trend fo to excess?
- because of the involvement of people
Positive emotions can contribute to management decisions…
So it is better to think of cycles as excesses and corrections and not up’s and downs.
Why do trend fo to excess?
- because of the involvement of people
Positive emotions can contribute to management decisions…
that result in the over expansion of factories, workforce’s and inventories . So if companies do this all at the same time, we get above average economic growth .
This is similar in the markets, when investors positive psychology causes stock prices to grow faster than…
This is similar in the markets, when investors positive psychology causes stock prices to grow faster than…
the value of the companies .
The stocks will eventually reach levels that are just unsustainable. They will eventually decline, that is a period of correction .
Are cycles dependable?
“ History doesn’t repeat itself, but it does rhyme.”
- this quote is the key to…
The stocks will eventually reach levels that are just unsustainable. They will eventually decline, that is a period of correction .
Are cycles dependable?
“ History doesn’t repeat itself, but it does rhyme.”
- this quote is the key to…
understanding cycles
-the details of cycles vary ( i.e their amplitude, speed, power, cause, effects)
- but there are underlying themes that do repeat. So learning about and recognizing these repeating underlying themes can get us ahead of the game .
-the details of cycles vary ( i.e their amplitude, speed, power, cause, effects)
- but there are underlying themes that do repeat. So learning about and recognizing these repeating underlying themes can get us ahead of the game .
Recurring themes behind most market excesses
-too much optimism
-too little risk aversion
-too much capital availability
-too much optimism
-too little risk aversion
-too much capital availability
Role of Optimism
-assets prices are determined by the interaction of fundamentals and psychology
-high levels of optimism result in assets being priced higher relative to their underlying fundamentals
-so with every investment , the investor should consider how much…
-assets prices are determined by the interaction of fundamentals and psychology
-high levels of optimism result in assets being priced higher relative to their underlying fundamentals
-so with every investment , the investor should consider how much…
optimism is built into the price
The importance of Risk Aversion
- the presence of risk aversion makes the market safe and sane. This is because risk averse individuals apply skepticism, perform due diligence, are conservative and demand a margin of safety.
The importance of Risk Aversion
- the presence of risk aversion makes the market safe and sane. This is because risk averse individuals apply skepticism, perform due diligence, are conservative and demand a margin of safety.
-however once investors become too excited and become oblivious to risk. The market becomes a dangerous place.
The impact of Capital Availability
-when investors have too much money in their hands. They become too eager to put their money to work, as they will have the fear…
The impact of Capital Availability
-when investors have too much money in their hands. They become too eager to put their money to work, as they will have the fear…
of missing out
-this will result in bidding getting too high
“ Too much money chasing too few deals”
No one knows the future, but we should try get odds on our side. We should only invest when odds are in our favor.
-this will result in bidding getting too high
“ Too much money chasing too few deals”
No one knows the future, but we should try get odds on our side. We should only invest when odds are in our favor.
When are odds against you?
-high levels of investor optimism
-recent market gains
-investors are happy with their gains/ jealous of the gains of others
-unwise risk tolerance
-eagerness to supply capital
These things are seen at cyclical highs .
-high levels of investor optimism
-recent market gains
-investors are happy with their gains/ jealous of the gains of others
-unwise risk tolerance
-eagerness to supply capital
These things are seen at cyclical highs .
When are odds on your side ?
-dearth of optimism among investors
-high levels of fear
-poor recent market performance
-widespread losses
-excessive risk aversion
-reluctance to supply capital
These are seen at cyclical lows
-dearth of optimism among investors
-high levels of fear
-poor recent market performance
-widespread losses
-excessive risk aversion
-reluctance to supply capital
These are seen at cyclical lows
That’s all for today. Please like, follow and retweet .
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