Book Summary | Mastering The Master Cycle – Howard Marks

I. Why Study Cycles

  • Risk is the possibility of things not going the way we wanted

II. Nature of Cycles

  • Cycles oscillate around a midpoint
  • Cycles will be always be there as every year there will be new market participants that join the market
  • There will be no bust without boom, they are the seeds of each other
  • Experience is what you got when you didn’t get what you wanted
  • People tend to extrapolate from recent experiences without real foundation

IV. The Economic Cycle

  • Main determinants of GDP growth is population growth and gain in productivity
  • In investing, performance is relative. Being right about an event is not enough to ensure outperformance if everyone else is right. To achieve outperformance, you have to be more right, or less wrong.
  • You don’t have to get correct forecast too, just superior forecast
  • Readily available quantitative data doesn’t bring much edge as they are already priced in
  • Most economic forecasts are just extrapolations, extrapolations are usually correct but not valuable
  • Unconventional forecasts are usually wrong, but very valuable when they are right. Hence most unconventional forecasts are not valuable
  • Those who forecast it right (like Michael Burry), have a lot of mis-predictions, hence their calls are not worth following as well
  • Simply put, there is no edge when you are right when everyone is right, edges are gain when you are right when everyone is wrong

VII. Pendulum of Investor Psychology

  • Like pendulum though it’s midpoint is “on average”, but it spends very little of its time there, most of the time, market stays overpriced or underpriced for long time
  • The SP500 averaged 10% in long run, but how many years are within 2% of that? i.e. 8% – 12% , the answer is not very often. Market spend very little of its time in the average value
  • It’s not the data, it’s the interpretation of it

IX. The Credit Cycle

  • When credit market is generous, asset price appreciate due to money is highly available. When credit is short, asset price sell at bargain price

XI. The Real Estate Cycle

  • They are not making anymore land , you can always live in it , it's hedge against inflation these won’t protect you if you bought it at too high of price
  • Very sensitive to demand as supply is quite hard to change rapidly

XIV. Cycle Positioning

  • In the long term, it’s reasonable to expect skill to win against luck

XV. Limits on Coping

  • Howard Marks only met these cyclical extremes 4-5 times out of his 45 years career

XVI. The Cycle in Success

  • Success can change a people, usually for the worse, they get overconfident
  • There is little to learn from sucess, people tend to overlook the factor of luck in their success
  • No investment strategy works all the time, some works in certain part of cycle only
  • When people discovered small caps, more money flowed towards it, appreciating its price, and then the outperformance will disappear
  • It’s unpopularity that’s buyer’s friend
  • Reform leads to growth and good times, good times lead to arrogance and overconfidence that lead to bad times

XVIII. The Essence Of Cycles

  • The greatest source of investment risk is the belief that there is no risk. This leads to subsequent market decline
  • Prospertiy brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and so on
  • Exiting the market after decline, missing the cyclical rebound, is the cardinal sin of investing
  • It's different this time is the most dangerous word in business

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