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mastering the market cycle by howard marks if someone tells you some chronicles about how much they predicted the market cycles which enabled them to make millions or even billions then believe it or not you might want to do your research before putting your money into following their predictions we believe that everyone should know about the right way of looking at the market cycles instead of relying on some traditional pundits which will lead you into an abyss of financial devastation howard marx is the co-founder of oaktree capital management which is the largest investor in distressed securities worldwide for years and years he has worked on market cycles and how an average investor can make decisions accordingly all of his wisdom is compiled in a single book mastering the market cycle and even the greatest investor of all time warren buffett has acknowledged the latter's approach towards the end of the market cycles in this video we're going to break hard marks approach towards stock market investing so that you guys can learn more about investing the right way by studying market cycles many people simply miss the chance of earning big due to their indecisiveness and lack of knowledge and awareness understanding the market cycle is a big step towards spotting the stocks with great returns in the long run but for that we need to understand that the best dividends are always paid by knowledge put to work so make sure you watch the video till the end so you don't miss out on anything welcome to 5 a stock market is a place where your understanding of the market will be put to test and this is a test that can cost you some serious money let alone grades if you're ordinary or way too casual with your decision making in this video we're going to uncover the secret of timing your investments in the market coming back to the story where you lost some serious money when your portfolio took a jab followed by a vicious uppercut which left you seeing sparrows the u.s china trade war made you sell most of your stocks simply because you couldn't stand looking at all those red figures every morning watching your hard-earned money slip out of your hands now this is a point where you should have held onto your stocks instead or even put some more money in them as the market was soon soaring to a new high you see now you have to start all over again you want to invest again but you find yourself asking these questions what if your portfolio takes another hit what if another crisis is just knocking around the door what if you don't even know if it's the right time to buy stocks you want to make things clearer for you right you want to be able to tell if the market is moving towards a bull or a bear and act accordingly in other words you want to master the market cycle now let's put it straight in investing no one can tell what's going to happen but you can tell us what's likely to happen that brings us to the fifth most important takeaway from howard mark's book mastering the market cycle which is to understand tendencies let us just say that you get an opportunity to participate in three lotteries all of these follow the same rules at the cost of one thousand dollars now the lotteries are all about drawing out a ball from a bag filled with ten balls if you draw a white one you get three thousand dollars if you draw a yellow one you will get your induction fee refunded and if you draw a red one you get nothing now which lottery should you go for lottery a has an expected payoff of 500 per ball drawn lottery b has a zero sum game and lottery c has a negative 500 payoff so it's quite straightforward going for lottery a would be the best option you should notice that even though lottery a is the best option and the superior lottery to participate in there's no guarantee that you'll win any prize but there is a tendency for it no doubt you can draw a red ball but the option is not very likely the same is true in stock market investing the intelligent investor is always able to tell which stocks have a higher probability of bringing back some profits or which bag holds the white ball it is important to understand that the mediocre investor just chooses a bag at random sometimes it will contain red balls and sometimes white sometimes you will be attracted to companies that will yield high returns and similarly sometimes to the companies which are yielding negative returns not to mention that there are times when even the mediocre companies are yielding high returns and times when even the superior companies are yielding negative returns therefore you must now learn when the tendencies are in your favor and when they are against your plans the fourth important takeaway from howard mark's mastering the market cycle is the introduction of the cycles when you saw your portfolio crash by 20 in late 2018 you witnessed a stock market cycle in action you also remember one of your friends making millions of dollars from the dot-com companies just to lose it after some time due to a market crash it is important to understand that the stock market isn't the only system that shows this type of cyclical behavior we see different seasons and weather coming during different times of the year similarly many phenomenon of physics are based on this principle and even success in one's life can be argued to follow this point according to howard marks a cycle revolves around what's known as the secular trend a standard that can be taken as a midpoint so that the investors can make their investment decisions according to the standard rather than relying on those highs and lows most cycles show the following trend from an excessive low to the mean the continuation past the midpoint to the extreme high reaching the extreme high a reversion back to the mean the continuation past the midpoint to the low and then finally reaching back below and the cycle continues an important point over here is that these points aren't just following each other they are following each other the stock market can also be taken as a pendulum it moves from optimism greed at high prices to pessimism fair and low prices and the cycle repeats warren buffett the greatest investor of all time puts it that what the wise do in the beginning the fools do in the end greed and optimism cannot continue to infinity it cannot deviate forever from the secular trend stocks become too expensive relative to their earnings and when investors turn more risk adverse the next crash comes lurking around the corner now the next step remains about how to identify these excessive highs and lows in the market cycle but first you must learn that the stock market does not function in isolation so that brings us to the third away what influences the market cycle the market cycle doesn't work in isolation the pattern which is followed by the market is a very dependable one the cycle is influenced by four other major cycles the first cycle is the economic cycle the main influencing objective in this cycle is the gdp or the gross domestic product of a country this can be calculated by multiplying the number of hours worked and the productivity per hour now it is important to know that the economic cycle is disrupted by various factors some of the most common are demographic movements the unemployment rate and globalization among other things the next cycle is the cycle of profits the profits of businesses are one of the factors by the help of which the prices of stocks are determined one of the most common indicators to determine if the prices are high or low is the price earnings ratio the total sales of all companies in a country are defined by definition equivalent to the gdp of that country but there is one thing to keep in mind profits fluctuate much more than the sales and the main reason for this is the leverage both in the operations and the financing of a company then we have the credit cycle credit is very important to companies in the stock market it can be used to speed up the growth of the companies and similarly it is necessary to roll over old credit not being able to get under new debt can cause companies to default when they're required to fulfill some old obligations it might be a sarcastic remark but most people and companies don't plan to repay their debts howard marx explains that prosperity leads to expanded lending which in return leads to unwise lending the second takeaway is the temperature of the market our position in the market can be determined by two factors firstly you should see the performances of companies and determine if they're out of line with the historical trends or not this is very important because if there are no deviations from the trend the market is not close to an excessively high or a low and in that case there is no need for a second step you should also take note of what the investing community around you thinks of the risk the most commonly used metric for valuations in the stock market is the price earnings ratio you can always track this down at multiple.com and check if the ratio points towards excessive high or low by looking at the columns the right column and the left column now that you know how to spot highs and lows you are in a good position to learn how to respond to that information correctly finally we've arrived at the first point aggressiveness verse defensiveness the thumb rule is quite simple by making use of all the information at hand firstly you will determine if you're in an excessively high or a low if you're lying down in an excessively low market you can plan your portfolio to be more aggressive by that we mean that you can risk more of your capital hold lower quality companies and make investments that are highly dependable on a good macroeconomic outcome you can also use financial leverage by using an aggressive approach like this you've made both a profitable swing and a very costly swing luckily now you know about the temperature of the market and you're now familiar with the tendency for a positive outcome but what if you find out that you're currently in an excessively high market you can tilt your portfolio to be more defensive instead now you can plan to hold more cash instead of stocks invest in safer stocks buy strong companies that are not cyclical and stay away from financial leverage with this approach you've made profitable and very costly swings both less likely as you were prone to a negative outcome howard marx's financial wisdom has changed the way people think about stocks and strategize their portfolios but understanding stocks the right way is an investment that will provide you with the best dividends in the long run remember that knowledge put to action is the best product for any value investor this is the reason we've provided a free guide in the description below which will explain the six stock categories in detail that are important for every value investor to understand check out the video we handpicked for you and we'll see you in the next one you
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