In his book – Mastering The Market Cycle, Howard Marks explains why in order to make sound investment decisions, we must be alert and perceptive, using inference to understand market participants’ behavior and the investment climate.
Observing current events and market sentiment—such as investor optimism or pessimism, media opinions, and the availability of capital—can guide us without the need for forecasting. When others are overly confident, we should be cautious; when they are fearful, we should be aggressive. ‘
By noting these factors, especially during market extremes, we can determine the appropriate actions to take, allowing present observations to inform our investment strategies.
Here’s an excerpt from the book:
If we are alert and perceptive, we can gauge the behavior of those around us and from that judge what we should do. The essential ingredient here is inference, one of my favorite words. Everyone sees what happens each day, as reported in the media. But how many people make an effort to understand what those everyday events say about the psyches of market participants, the investment climate, and thus what should be done in response?
Simply put, we must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panicked selling, we should become aggressive.
So look around, and ask yourself: Are investors optimistic or pessimistic? Do the media talking heads say the markets should be piled into or avoided? Are novel investment schemes readily accepted or dismissed out of hand?
Are securities offerings and fund openings being treated as opportunities to get rich or possible pitfalls? Has the credit cycle rendered capital readily available or impossible to obtain? Are price/earnings ratios high or low in the context of history, and are yield spreads tight or generous?
All of these factors are important, and yet none of them entails forecasting. We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.
The key is to take note of things like these and let them tell you what to do. While the markets don’t cry out for action along these lines every day, they do at the extremes, when their pronouncements are highly important.
You can find a copy of the book here:
Mastering The Market Cycle – Howard Marks
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