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.

There is a theory that investors are rational people. It can be true based on doing your research and knowing what value is, then you reach the investor psychology. Investors will bounce back and forth or have pendulum swings between: greed and fear; optimism and pessimism; risk tolerance and risk aversion; credence and skepticism; faith in the value in the future and insistence of concrete value in the present; urgency to buy and panic to sell. These pendulum swings are seen most at the top and bottom of the cycle. Somedays it will feel everything that was good yesterday is bad today and vice versa.

Risk and return is an important element of investing. There is a graph with return on the y axis and risk on the x axis and the line slopes up to the right. Mr. Marks says it should be interpreted as Investments that seem risker have to appear to promise higher returns, or else no one would make them.

The Chicago school of finance essential assumption is most people are risk averse or they would choose a 7% guaranteed rate or a possible 7% return. This risk aversion is the main element that keeps markets safe and sane.

After an investor has been exposed to risk, there attitudes can and do change.

When economies are doing well, people in general relationship to risk changes to taking on more risk based on the idea that things will continue to do well.

For Mr. Marks the greatest source of investment risk is the belief that there is no risk. The reason is cycles change and they are marked by the extremeness on both ends. Once the good times stop, investors become overly cautious which contributes to markets going down. This negativity causes prices to fall to levels from which losses are highly unlikely and gains could be enormous. But the sting of the prior declines tends to increase risk aversion and send investors to the sidelines just as prices (and their risk) are at the lowest.

(there are many examples but a recent one was during COVID, oil prices fell because of no travelling, and the oil stocks fell in price. Once travelling could be done, demand for oil went up, prices went up and oil price stocks essentially doubled.)

Linking to dividend paying stocks, investing is about risk and reward. Buying an equity and the price rising and receiving a dividend overtime is a good thing. If you pay more attention to the profitability of the company and its ability to continue the dividend then even the price moves, for the time you own the stock it is less important. The reason is total return on your investment – price increase plus all the dividends you collect every quarter.

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