If you invest the goal is to have more and the easiest and hardest way is to buy low, hold on to your investments for a period of time, sell some of it when it is high and buy more when it is low. That is a cycle. The way a cycle works is when you look backwards, it is easy to see. When you look forward it is very hard to know what and when the top or bottom is. One person who has tried to use cycles as an investment philosophy is Howard Marks, the founder of Oaktree Capital Management. Mr. Marks has written a number of books and every once in a while, he publishes his thoughts on Oaktree Capital Management website. Mr. Marks has made money buying low and selling high and wrote a book called Mastering the Market Cycle, published by Houghton Mifflin Harcourt Publishing Co, NY, 2018.

The investing dynamic will always be in a cycle. People will often ask me what caused the cycle to begin or are we close to the end of the cycle. Cycles neither begin nor end. Better questions might be what caused the current leg up to begin? or how far have we gone since the beginning of the up cycle? Cycles have no beginning or ending because they never end, the wave continues.

All cycles have a midpoint and when the investment world is there, is a happy medium or a rational midpoint. The further from the midpoint means booms and bubbles are followed by harmful busts, crashes and panics. Then the cycle turns. (in September the market fell and then came back after a week and commentors noted how fast it went down and then back up).

Although every industry has cycles, they are all a little different. For example: sales of industrial raw materials are directly responsive to the economic cycle of supply and demand. However, everyday necessities such as food, beverages and medicine are not. If you normally buy a loaf of bread, with more money in your pocket you will not likely buy 2 loaves, if there is less money in your pocket you will likely trade to a different brand at a lower price, but still only one loaf.

The linkage between economic growth and profit growth is highly imperfect. One of the main reasons is that most businesses are characterized by leverage of 2 types. These are elements that magnify the response to the profits to a change in sales. First is operating leverage. Profits equals revenues – minus costs. Both revenue and costs do fluctuate. Most businesses have some costs that are fixed, semi-fixed and variable.

Operating leverage means the increase in operating profits will be considerably greater that the increase in sales. In general, it is more for companies whom a larger percentage of costs are fixed and lower for costs that are more variable.

Operating leverage is great for companies when the economy does well and sales rise. But when the opposite happens, it is less good.

The second form of leverage is financial leverage. Given most companies are financed with both equity and debt. If a decline in operating profits affects equity first as debt is fixed which translates to a larger decline in net income.

Linking to dividend paying stocks, often those that own dividend paying stocks tend to use margin to buy the stocks, given it is a long-term hold. If you do not use margin, then what cycle in the market really does not matter, prices will go up and down and when the prices go down as long as the company remains profitable, the yields on your dividends go up. There are many advantages to holding dividend paying stocks in a cyclical market.

There are more questions than answers, till the next time – to raising questions.