Sunday, March 2, 2014

Thinking about cycles from Howard Marks

You can't predict. You can prepare." tag line from MassMutual Life Insurance and Howard Marks of Oaktree.

Rule number one: most things will prove to be cyclical
Rule number two: some of the greatest opportunities for gain or loss come when other people forget rule number one

-Howard Marks

For example, there is a strong credit cycle which is based on some simple concepts or processes. The economy moves to prosperity providers of apical will do better which increases the capital base of entrepreneurs. There is less bad news which means that the perceive drink of lending is thought to be low. Risk aversion form lending starts to decline. Banks will do more lending. Credit is easily available, but the competition across banks leads to a cutting of spreads, lowering of credit standards, and easing covenants. This is the credit cycle of Minsky and even Ben Bernanke. The result is the potential for loses once the market turns. 

The worst loans are made at the best of times 
-The Economist 

Cycles will be base on swings in sentiment. The difference between euphoria and depression,  or greed and fear. The swings are based on what Galbraith stated as the "extreme brevity of the financial memory." This means that investors have to show courage at the market extremes. 

'To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profits. -Sir John Templeton. 

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