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.

Superior investing does not come from buying high-quality assets, but from buying when the deal is good, the price is low, the potential return is substantial, and the risk is limited. The slammed-shut phase of the credit cycle probably does more to make bargains available than any other single factor.

The economy runs on credit or bank financing. When it is plentiful the door is open to give loans and increase loan sizes. When it is closing, few loans are given (banks will have a number for their loan officers to give – usually it is less than the demand for loans). and only those seemingly without need of the money will be given credit increases. When this happens the economy contracts.

The key to dealing with the credit cycle lies in recognizing that it reaches an apex when things have been going well for a while, news has been good, risk aversion is low and investors are eager. That makes it easier for borrowers to raise money and cause buyers and investors to compete for the opportunity to provide it. The result is cheap financing, low credit standards, weak deals and the unwise extension of credit. At this time investors should proceed with caution.

When the reverse is true and it is very hard to get credit, the lender has all the options. It is at this time, investors should be moving into an aggressive mode.

The opportunities to profit in distressed debt are highly cyclical and determined by developments in other cycles. An example of this high yield debt:

At the start, appropriately risk-adverse investors apply stringent credit standards to the issuance of high yield bonds.

the same healthy economic environment that facilitates bond issuances makes it easy for companies to service their existing debt (or defaults are scarce)

the returns convince investors that high yield bond investing is safe, attracting more capital to the market

Increased capital for investment translates into increased demand for bonds. Wall Street never allows demand to go unmet, more high yield bonds are issued.

The same conditions that allows larger amounts of bonds to be issued – strong investor demand – invariably also allows bonds of lesser creditworthiness to be issued.

Something happens in the economy which cause corporate profits to decline such as a recession. Profits decline, those bonds that had little lack of margin begin to default. Due to the outlook for the recession, credit window closes up and debt can not be refinanced and more bonds default.

The default leads to investors who were risk-tolerant not becoming risk-adverse.

Buyers become scarce and sellers predominate.

Eventually the economy begins to recover and the credit market reopens. The default rate slows and prices begin to rise rather than fall. Balance sheet restructurings restore companies viability and value is unlocked. The cycle begins again.

Linking to dividend paying stocks, most investors are interested in higher values in the future or the stock price increases after you bought it. As long as you are positive in the stock, it feels good and you can sell at a profit. All stocks throughout the year move up and down in price, in addition depending where you are in the cycle they will move up and down. Quality stocks tend to bounce back first after the market falls, which is why you should own the best in breed or profitable stocks in your portfolio.

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