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I believe that there are cycles and that they're extremely important to understand I believe there always will be Cycles I have followed cycles for 50 years I've 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 a 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 SNP average of stocks at 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 eight so why is the average not the norm and uh this is a very important question to understand because 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 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 correction 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 fman 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 well not today I'm tired theoy canado 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 uh what they're supposed to 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 upcycle 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 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 where there 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 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
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