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 market cycle of the markets is:

events in the economy and in corporate profits turn increasingly positive

positive events feed investor psychology and investors’ tolerance for risk rises

rising psychology causes investors to be less demanding in terms of risk protection and prospective return

the combination of the above causes asset prices to rise

eventually the process goes in reverse. Events fail to live up to expectations

Cooler heads conclude that prices have reached levels that are unjustified, or prices soften for no apparent reason

Prices fall when events are less positive or come to be reviewed less positively

Having turned downward, asset prices continue to decline until they fall so low that the stage is set for recovery

repeat again and again

3 Stages of a Bull Market

the 1st stage, when only a few unusually perceptive people believe things will get better

the 2nd stage, most investors realize that improvement is actually taking place

the 3rd stage, when everyone concludes things will get better forever.

If you buy in the 1st stage you will find bargain prices which substantial appreciation is possible. If you buy in the 3rd stage you will pay a high price and likely lose money as a result.

(a quip from Joseph Kennedy – after making money during prohibition he became a Wall Street investor – when you get tips from the shoeshine boy it is time to sell.)

What the wise man does in the beginning, the fool does in the end.

Every investment trend eventually is overdone and bid up too far, so the buyer in the end pays for potential that is overrated.

3 Stages of a Bear Market

1st stage – a few thoughtful investors recognize that despite the bullishness, things will not be rosy

2nd stage – most investors recognize that things are deteriorating

3rd stage – when everyone’s convinced things can only get worse

There is nothing as disturbing to one’s well-being and judgement as to see a friend get rich (Charles Kindleberger – Manias. Panics and Crashes: A History of Financial Crisis, 1989)

Linking to dividend paying stocks, when stocks prices in general move upwards and you are rewarded more than you expected to be, it opens up opportunities and dreams for you. There is nothing wrong with taking profit. If you reinvest it another stock it can open up more dividends or you can diversify your portfolio which means if the market goes down, you are affected but not by much and it can quickly rebound. It is important to understand markets go up and down and when you see many signs of too much froth in the market, it is okay to sit in cash or cash equivalents and wait till the market falls to buy good dividend paying stocks at wonderful values.

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