CyclesCopy Anchor Link

CyclesCopy Anchor Link

Cycles are howard-marks's central claim about how markets actually behave: prices and attitudes do not trend smoothly but oscillate, driven by investor psychology, and these oscillations are "inevitable, often profound, and the most reliable feature of the business and investment worlds."

The master metaphor is the pendulum. Market mood "resemble the movement of a pendulum": though its midpoint describes the average, it "spends very little of its time there", almost always swinging toward or away from the extremes — and "the movement toward the extreme itself ... supplies the energy for the swing back." In investment terms the pendulum swings between euphoria and depression, between celebrating positives and obsessing over negatives, and thus between overpriced and underpriced.

Marks enumerates several distinct but interacting cycles. The economic cycle is gentle on a long graph; the business cycle amplifies it; the profits cycle exaggerates further through operating and financial leverage; the credit cycle "moves dramatically, usually oscillating between periods when the capital markets are wide open and periods when they're slammed shut"; and the market cycle "reacts violently, as investor psychology magnifies all of the above." The credit cycle and psychology connect directly: good times bring rising profits, which breed lax lending, which sows the next downturn.

The driver of cycles is not information but memory and emotion. Marks observes that shortness of memory "plays a major part in abetting these swings" — if investors remembered past bubbles and busts, "the swings would moderate. But, in short, they don't. And they may be forgetting again." The upswing is self-reinforcing: "the cyclical upswing is circular ... It takes on the appearance of a virtuous cycle that will proceed non-stop, and it does so ... until it fails."

Cycles have a history, and Marks mines it. His January 2000 memo bubble.com uses the 1720 South Sea Bubble — where Sir Isaac Newton sold early, then bought back at the top and lost £20,000 — to show that "Not even one of the world's smartest men was immune" to mania. The lesson is that speculative excess is a recurring, recognizable pattern, not a one-off aberration.

The practical payoff is position-sizing, not prediction. Marks's November 2001 memo is titled You Can't Predict, You Can Prepare — cycles make the future's direction unknowable in advance, but their recurrence tells the investor when risk is elevated (after euphoria) or opportunity is abundant (after panic). This is the bridge between risk-vs-uncertainty and action: you cannot time the turn, but knowing where the pendulum is gives you a basis for margin-of-safety and for the contrarian stance that underlies second-level-thinking. See risk-vs-uncertainty.

One caveat Marks raises against pendulum-only thinking: some regime shifts are structural, not cyclical — the sea-change argument that ultralow interest rates of the 2010s permanently reset asset prices, not merely swung the mood. Cycles still exist inside a different regime.

See alsoCopy Anchor Link

• underwriting-cycles
• crowd-behavior-episodes

SourcesCopy Anchor Link

• howard-marks/Memos-Markdown/2004-07-21 - The Happy Medium.md
• howard-marks/Memos-Markdown/The Best of . . ..md
• howard-marks/Memos-Markdown/2011-05-25 - How Quickly They Forget.md
• howard-marks/Memos-Markdown/2000-01-02 - Bubble.md
• howard-marks/Memos-Markdown/2001-11-20 - You Cant Predict You Can Prepare.md
• howard-marks/Memos-Markdown/Sea Change.md