Monday, 11 March 2019

Marks, Howard – Mastering the Market Cycle

Marks, Howard – Mastering the Market Cycle
Houghton Mifflin Harcourt, 2018 [Finance] Grade

The holy grail of investing is market timing and its
realization is about as elusive. This is a guide on
how to master the financial market cycle, which is
something in a way related to market timing, but
still very, very, very different. The master (that
word again…) corporate bond investor and
investment writer Howard Marks at Oaktree
Capital Management is among those whom I
admire most in financial markets and his first book
The Most Important Thing ranks among my top five
all time investment books. In a way this is a slight
problem when it comes to Mastering the Market
Cycle. A classical advice to companies reporting
their financials is to “under-promise and overdeliver”
– the thing is that Marks’ first book drives
up expectations for this one to a level it cannot
fully live up to. But it’s still a really inspiring book
on an important and under-discussed area that I
will put to good use immediately.

A fundamental cornerstone for the author is that
financial markets cannot be predicted with any
practically usable precision in the short to medium
term. This doesn’t mean that all market outcomes
are equally probable at all times. By looking to
current conditions and by this forming an opinion
on where we are in the market cycle an investor,
according to Marks, can tilt his portfolio to take
advantage of what is more likely to happen in the
years ahead. It’s both about what one thinks will
happen depending on where one is and about the
probability of this happening compared to other
scenarios. If an investor is good at this game it
should pay off in the long run and he tilts the odds
for success in his favor. Prepare, don’t predict. I
think he is totally spot-on in this respect.

Another key basis in mastering the cycle is to
understand that things don’t just happen one thing
after another in – unfortunately irregular – cyclical
patterns. What happens in one stage of a market
cycle is instead causing it to move on to the next
stage. Cycles are chains of cause-and-effect
relationships. After a pair of introductory chapters
the main part of the book is devoted to describing
a large set of interrelated and parallel such cycles:
the economic cycle, the profit cycle, the risk
attitude cycle, the credit cycle and so on.

Underlying all these is the cyclical patterns in
investor psychology – a topic clearly nearest to
Marks’ heart. To a large extent Marks reads various
psychological markers and positions himself in the
cycle by these. Next comes one chapter that tries
to assemble all the above cycle inputs into the full
mosaic of the market cycle. The book finishes with
a few concluding more practical chapters and a
needlessly cut-and-paste type of summary.

It is honestly a luxury to have 50 years of hard won
experience condensed in such a graspable format.
Marks is a simply superb writer. Much like Warren
Buffet the language can be deceptively simple,
causing fairly complex issues to sound like child’s
play. Make no mistake – this is investment thinking
on the highest level. Still, compared to the high
standards set by the author’s investment letters
some passages of the book are a bit repetitive with
their long and recurring chains of cause-and-effects
and some newly written chapters that don’t build
on previous investment letters, but are required to
make an coherent story, are perhaps slightly less
inspired than the others.

There are clearly others who have made
contributions to the understanding of market
cycles such as Hyman Minsky, various Austrian
economists, the books from Marathon Asset
Managed edited by Edward Chancellor plus many
others. However, since Marks is so focused on
reading non-fundamental and non-economic
signposts I think the most complementary book
might be Big Debt Crisis by the more Borg-ish Ray
Dalio with his “economic machine”-concept, who
obviously mostly zeros in on the central bank
dominated cycle of monetary policy.
When it comes to books on market cycles this is a
must read – but it could have been even better.


Mats Larsson, December 15, 2018


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