In his recent Real Vision interview Howard Marks discussed how understanding the market cycle can tell investors what’s likely to happen next. Here’s an excerpt from the interview:
I think the the key to understanding the business cycle is… and the market cycle is that you know most behavior is cyclical and basically goes too far. If we were not subject to excesses and corrections then everything would hue closer to the midpoint or the trend line or whatever we want to call it.
But the point is that the human contribution to the behavior of economies and businesses and markets causes excesses in one direction and then reversion toward the mean that carries through the mean into an excess to the opposite direction. These things are not so regular as to be predictable in time or in amount but they can predictably be expected to happen.
I believe that the cyclical excesses tell us what’s more and less likely in the future. It doesn’t tell us what’s going to happen. It certainly doesn’t tell us when but, it tells us a lot about what I call the tendencies, the likely outcomes. So for example when the market is elevated in its cycle and valuations and psychology are above something we’ll call the midpoint then the next move is more likely to be down rather than up. It doesn’t have to be, and from any point in the cycle anything can happen.
If we’re elevated in the cycle we can go still higher. We can flatten out or we can turn down and so you know where we are and what’s likely shouldn’t be confused with what’s going to happen next. But I do think that where we are influences the probabilities.
You can watch the entire interview here: Real Vision – Howard Marks – To Catch A Falling Knife.
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