Book Review: Mastering The Market Cycle

Since I love Howard Marks’ investment memos and I liked the last book I read from him, I decided to read another one. Today, I finished Mastering The Market Cycle. The essence of the book could be summarized as “What the wise man does in the beginning, the fool does in the end.”

I wrote book reviews before, and I always had the strong feeling, that it’s a good idea to think or write about the content of a book I had just finished. And now Swen Lorenz gave me a good deal of approbation, writing in his blog

When we merely read something, we are lucky to retain 10% of it. However, when we read something and then explain it to someone else, we retain about 90%.

Marks addresses a handful of different economic cycles in the book. Nothing surprised me that much, but I still found the book worth reading. All chapters are easy to read and the book explains the strong interconnectedness between the different cycles perfectly. I want to list a few of my highlights below.

The most important phrases, insights and expressions are to be found over and over again in many different chapters. It probably helps remembering them.

The essence of the book could be summarized as ‘What the wise man does in the beginning, the fool does in the end.’ It is even shorter than the below three stages of a bull market — which I read many times in the book, and still don’t mind reading again — and contains a simple truth:

• the first stage, when only a few unusually perceptive people believe things will get better,
• the second stage, when most investors realize that improvement is actually taking place, and
• the third stage, when everyone concludes things will get better forever.

It is not about forecasting the future but about measuring todays market temperature as Marks describes it. If we roughly know where we (might) stand today, we have a better chance of getting the odds in our favor since we gain a small advantage about future tendencies. This advatage is quite small if a cycle is at its happy medium or long-term average (where it only spends little time). We might only have a real advantage at the extremes of the pendulums. But we should not fool ourselves! Knowing that something is overvalued, if far from knowing that it will go down tomorrow.

The credit cycle is described as one of the most important cycles by the author because it influences so many other cycles.

Regarding the economic cylce he makes clear that ‘the economy’ usually grows a few percentage points a year. Deviations are rather small, i.e. a few percentage points only. But these minor fluctuations influence (beside other factors) companies profits which fluctuate stonger than the economy as a whole. And these companies’ shares usually fluctuate even much more than profits do, which can be contributed to a great extend to investors’ psychology.

An ideal-typical overview of the two extreme states of different cycles and what action is called for as an investor, as I remember right after finishing the book today morning, is to be found below.

Dimension	Market Top	Market Bottom
investors (only) care about	not missing opportunities	not losing money
mood	greedy	fearful
prevailing view	things getting better forever	doom
prices	high	low
return potential	low	high
risk aversion	low	high
risk premiums	low	high
risk	high	low
credit availability	abundant	scarce
economic growth	above secular trend	below secular trend
company profits vs expectations	exceeding	dissapointing
time to calibrate your portfolio to be more	defensive	aggressive