저자: σιωπηλό φλάουτο · 외국인
다듬은 글
I believe that there are cycles and that they are extremely important to understand. I believe there always will be cycles. I have followed cycles for 50 years. I think I've been able to help our clients by dealing with the cycles. And halfway through writing the book, a thought occurred to me. Why are there cycles?
That's really an important question. Why do cycles occur? If the US GDP grows about 2% a year on average, well, why doesn't it just grow 2% every year? Why sometimes three and sometimes one? And sometimes four and sometimes negative in a recession. The S&P average of stocks uh returns about 50% uh 10% a year on average.
And it has done so now for about 90 years. Almost 10% a year. Why doesn't it just give 10% every year? And in fact, if you look at the history, rarely is the return between 8 and 12. It's usually much better than 12 or much worse than 8. So, why is the average not the norm? [clears throat] And uh this is a very important question to understand because of in order to deal with cycles.
And the answer is simple, that the positive trends in the economy or the market eventually go to excess. Remember the third stage. And those excesses correct on their own or are corrected. And that's the most of what I'm going to talk about for the rest of this section. And so, rather than thinking of the cycle in terms of ups and downs, which I always did and most people do, I think it's better to think of excesses and corrections.
Excesses when things go too strong and corrections when they go too weak. So and why do we have excesses? Because of the involvement of people. This is not mechanics. This is not physics. This This is an area where people have a very strong impact. And Richard Feynman, who was a great physicist, said, "Physics would be much harder if electrons had feelings." We walk in this room, we turn on the light switch, and the lights go on every time.
Why? Because the electrons flow from the light switch to the light fixture every time. The electrons never say, "Not today. I'm tired." Can't They never go in the wrong direction. They never go on strike. And they always do what they're supposed to do. But people rarely, in my opinion, do what they're supposed to do and especially not at the extremes.
And because economies and markets are made up of people, and people have feelings, we get cycles. So, for example, positive feelings can make the directors of a company anticipate big demand and build a factory and hire workers and and and produce for inventory. And if they all do it at the same time, then we get a period of above average growth from the factory building and the inventory producing.
And then that we have an what's called a an up cycle. In the market, positive investor psychology causes stock prices to grow faster than the value of companies is growing. The value of companies may grow 6, 8, 10% a year on average. But, in the 1990s, for example, stocks in the US, the S&P 500, appreciated 20% a year.
So, the value of companies was growing like this. The price of stocks was growing like this. That's dangerous because that creates an excess. And then, eventually, the excesses can be corrected. So, if every factory management builds a new factory and hires workers and produces for inventory in anticipation of strong demand, we may get to a point where are too many factories and too much in inventory and earnings are disappointing.
And then, they close the factories, they lay off the workers, they sell from inventory rather than produce, and we have a period of below average economic growth or maybe negative economic growth, which becomes a recession. Likewise, if prices outstrip the value of companies for long enough and become too high, they can't stay up, they can't go up further, they have to flatten out or decline.
That's a period of correction. So, bullish periods are followed by bearish periods. So, it's the creation of excesses and corrections, and I think it's better to think of cycles that way than ups and downs. Now, the next question that's important is the cycles that I've been talking about, are they dependable or not?
And the best way to understand the answer to that question is another quote from our friend Mark Twain, who said that history does not repeat, but it does rhyme. Very important. This is a theme that runs through my book. The details of cycles are always different from one to the next. The The amplitude of the fluctuations, the length of the cycle, and the speed of the fluctuations always different.
And also different are the causes of the cycles and the effects of the cycles, the ups and downs. And people nowadays say to me, "Well, this cycle, which cycle from the past is it like?" And it has some characteristics of others, but it's never quite the same. History does not repeat. But there are certain underlying themes that do repeat or do re- do rhyme from one cycle to the other.
And if we can learn about them and recognize them, then we can be ahead of the game. So, for example, in my period in this business, I've lived through about a half a dozen uh important bull markets. And in general, they have certain themes that that do repeat. And here they are. Too much optimism, too little risk aversion, and too much capital availability.
And if you if you look at those and you think about those, those three things in themselves are a pretty good recipe for a bull market. And it's pretty hard to imagine having a bull market without them. So, these are the themes that we should associate with a bull market, which is to say a period of appreciation to excess.
Now, let's talk about the three. First of all, optimism. Most people think or many people think that that asset price rises are produced by good events. But the the connection is not just between events and prices, it's events and psychology. It's events and how they are perceived that produce changes in asset prices.
And the role of perception or psychology in the setting of asset prices is extremely important. All things being equal, a high level of optimism will cause things to be priced high relative to their fair value or what we call the intrinsic value. So, it's the job of the professional, in my opinion, to figure out for each stock, company, or building, what is the intrinsic value?
And I'd like to buy when the price is below the intrinsic value and sell when it's above. And I think that's a simple recipe for how an investor should behave. So, we have to figure out the intrinsic value, but clearly in a period of great optimism regarding the future, prices will tend to be high relative to the intrinsic value.
We want to know that. And the higher the optimism, most of the times the higher the price. And as I say here, if I could know only one thing about every investment that I was considering, it might be how much optimism is priced into the shares. And that's an important element in considering every bull market.
Secondly, risk aversion. Risk aversion is not a concept that most people think about every day, but it's extremely important. And most people are afraid of losses. That is to say, they are risk-averse. And uh for most people, if they make a thousand euros, they're okay. But if they lose a thousand euros, they feel terrible.
So, the losses count more than the gains for most people. So, most people are biased towards risk aversion. And risk aversion is a very, very important ingredient in the markets. When people are risk averse, as they should be, then what happens? If they consider an investment, they study it thoroughly.
They make only conservative assumptions. They are rigorous in their analysis. They demand a margin what we call a margin of safety. I want to be sure that if things go poorly, I'll be okay. And they demand risk compensation. If they're going to do something which is risky, they demand an exceptional return as a potential reward.
So, when we have risk aversion, then we have conservatism and caution and diligence and and demands for uh risk premiums, then we can say that the market is safe and sane. But when people get excited about the future, and they get excited about what's been going on, they forget to be risk averse. They become risk tolerant.
They become accepting of risk. And when they do, what happens? They say, "Well, it's not so important to do due diligence and to make conservative assumptions, cuz if I'm too careful, then I will miss something and my friend will get it." And, you know, there there there was a There's a book by a man named Kindleberger who says there is nothing worse for your mental condition than to watch a friend get rich.
And eventually in the market, fear of missing out takes over from fear of losing money. And then people do bad things. So, we have to understand whether the market is based on risk aversion or on risk tolerance. And when it's risk tolerance because people are excited, then we have to understand that the market can be a dangerous place.
Number three, the impact of capital availability. The market is an auction place. Especially for a good way to think of it is the loan market. You know, you you want to borrow some money, you go to a some banks. Each one bank tells you what they'll do to provide you money. But if there's too much capital in the hands of people and they're too eager to get to put it to work because they're afraid of missing something, then the bidding goes too high and the price becomes excessive, at which point the prospective return is low and the risk is high.
And we want to know that. When there's too much money chasing too few deals, those are the seven worst words in the world. Too much money chasing too few deals. And it happens from time to time. And I wrote I wrote a a memo in I write memos to the clients and the people from the bank and help you get them if you're interested.
[snorts] And I wrote one in February '07 before the global crisis entitled the race to the bottom. Because the bidding was too strong, which meant that the winners of the auction were winning the opportunity to make bad loans and buy overpriced securities. We can figure out when that's the case if we have exceptional judgment and we can act accordingly.
So I'm going to sum up on the subject of cycles by taking you through a typical one and I hope this is helpful. On the way up, let's say, so we start off and there's been a bad experience and we're at a low point and then things start to head up. And on the way up, economic fundamentals are improving and earnings are increasing and beating expectations and the media are reporting only good news cuz that's what they do.
And as a result, investor expectations for the future rise, psychology gets stronger, people perceive only favorable developments, capital is readily available, asset prices rise, the holders of assets are happy and want to buy more, and the people who haven't been in the market are unhappy because of jealousy and begin to buy.
Everybody wants to buy, nobody wants to sell, risk aversion evaporates, and what do people say? They say, "Risk is my friend. The more risk I take, the more money I make, and any anyway, I don't see much to worry about." And when that becomes the case, then prices go too high and eventually we reach something that investors, professionals call a top.
The top, the maximum, the price be which beyond which the market will not go. And at the top, asset prices are high, prospective returns are low or negative and risk is high. This is the time for caution. But most people are unable to be cautious at the top since the high in prices corresponds with the high in emotion.
No one's willing to bear the risk of selling and missing out on the future gains and that's human nature. Eventually, the top is passed and now we're on the way down. Excuse [clears throat] me. And on the way down, economic fundamentals deteriorate, earnings decline and fall short of expectations, and the media report now only bad news.
And as a result, investors' expectations decline, psychology gets weaker, people see only undesirable invest developments, asset prices fall, holders of assets are chagrined and sell, and the people who haven't held assets pat themselves on the back for their wisdom, but of course refuse to buy. Now, risk aversion grows and investors flee from risk saying, "Bearing risk is just another way to lose money.
I don't care if I ever make a euro in the market again. I just don't want to lose any more. Get me out." And the worse things go and the lower prices go, the more people want to sell. And that's human nature. All you have to do is understand human nature. And at the bottom, asset prices are low and prospective returns are ultra high and risk is low, this is the time to be aggressive in the market, but most people are terrified at this point because the low in prices corresponds with the low in psychology.
And they just can't move ahead because they're depressed and they're cautious. So, that's a cycle. And you can see how the events conspire to cause people to do it wrong. There's nothing that says sell at the top other than your own mentality, and there's nothing that says buy at the bottom. And we see this all the time, but this This human nature and it will never change.
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