The idea that the market goes through cycles is a powerful one that many investors subscribe to. Ray Dalio (Trades, Portfolio) believes in them, as does value investor Howard Marks (Trades, Portfolio). However, just because some historical events seem to follow a pattern with some regularity does not mean that everything will always happen like it did in the previous cycle. In a talk at The Wharton School in August 2018, Marks explained why this is the case.
History doesn’t repeat, but it does rhyme
Marks began by advising his audience to not read too much into the duration of past cycles, even though the events themselves can be very instructive:
“Let me try to convince everybody in the room not to fixate on the regularity of cycles. I think cycles are one of the most important things in the world, and if you’re going to live in the world one of the most important things is to recognise cycles as they occur, and where we stand in them, and what that implies for the future. But I think it’s really a big mistake for anybody to think of cycles as regular.”
An example of this kind of thinking is when commentators point to the length of the bull market of the last 10 years (the longest on record) as a reason for why a downturn must be coming. There are certainly legitimate reasons to believe that a recession may be coming, but simply pointing to the length of previous cycles is not really a good argument, and doing so can lock investors into a frame of mind that causes them to miss opportunities:
“The prevailing threat through [my] book is a quotation attributed to Mark Twain: 'history doesn’t repeat but it does rhyme.' What that means is that the reasons for cycles, their violence, their amplitude, their duration, their speed are never the same. And people who impute too much dependability on, say, 7 or 8 [cycles] tend to get in trouble, because they either anticipate to much or they miss things. But they do rhyme”.
So if the length of cycles cannot be depended on, what can be? In Marks’ opinion, it comes down to the reasons behind cycles:
“What does seem to recur is that most things in life are cyclical, and the reasons for them have cyclicality. And they are mostly: when there is too much money, too little risk-aversion, too little fear, too much eagerness, etc - that’s how you get excesses to the upside that have to be corrected to the downside.”
You can’t predict when the next bubble might burst because the dynamics will always be different depending on where the bubble is happening. A buildup in consumer debt will probably lead to a different kind of problem than a buildup in corporate debt, for instance. But the basic building blocks of cycles, greed, exuberance, fear and despair, will always be the same. These are the constants that investors should be focused on.
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