Investing can be profitable as well as fun, but it can also be unnerving and unprofitable if you don’t understand markets and don’t have the right mindset. The basics of successful investing are timeless and some experts have a knack of encapsulating these in a way that’s insightful. A year ago I wrote on 21 investment quotes I find useful (see 21 great investment quotes, Oliver’s Insights, April 2014). Here are some more.
The market and cycles
“The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.” Seth Klarman
Cycles are an investing reality. Not just shares – but also bonds, property, infrastructure, term deposits, whatever. They all go through cyclical phases of good times and bad which are driven by the combination of fundamental economic & financial developments invariably magnified by investor behaviour that has a habit of extrapolating current conditions into the future. Some cycles are short term, such as those that relate to the 3 to 5 year business cycle. Some are longer, such as the secular swings seen over 10 to 20 year periods in shares.
Source: Global Financial Data, AMP Capital
“In the old legend the wise men finally boiled down the history of mortal affairs into a single phrase: ‘This too will pass.’” Benjamin Graham
Just as historical experience tells us there are investment cycles, it also tells us that they pass. Despite all the “new eras”, “new paradigms” and “new normal” commentators wheel out at cycle extremes, all cycles contain the seeds of their own reversal. When someone tells you about a new whatever, it’s probably already run its course. So when, after a major share market collapse in the midst of recession, it seems there is no hope, just remember “this too will pass.”
“It’s so good it’s bad, it’s so bad it’s good”. Anon
In every cycle there comes a point where fundamental conditions are so good that they are bad: economic growth is so strong that its causing inflation to rise and central banks to run ever tighter monetary policies; shares have become overvalued; and investors have piled in at such a rate that there is no one left to invest. This then sets up a market top and a new bear market. And the reverse applies during economic and market downturns. Which brings us to contrarian investing.
“The way to make money is to buy when blood is running in the streets.” John D Rockefeller
This is a bit extreme, but it illustrates a key point. The best time to buy shares and other growth assets is after a sharp fall and a good guide is the economic and financial pain around you. When it is at an extreme and it all looks hopeless then that’s usually a good sign that there is long term value to be found!
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