Mastering the Market Cycle - Howard Marks

Currently reading, but here are my notes so far:

1. Warren Buffet's two criteria for a desirable piece of information: it has to be important, and it has to be knowable.

2. Markets rarely go from underpriced to fairly priced and stop there. Usually the fundamental improvement and rising optimism that cause markets to recover from depressed levels remain in force, causing them to continue right through fairly priced and on to overpriced. It doesn't have to happen, but it usually does.

3. Cycles have more potential to wreak havoc the further they progress from the midpoint. If the swing towards one extreme goes further, the swing back is likely to be more violent, and more damage is likely to be done.

4. Most people think of cycles in terms of the phases of the business cycle, and most understand that these events regularly follow each other in a usual sequence. But the events in the life of a cycle shouldn't be viewed merely as being followed by the next, but as each causing the next. For example:

   1. As the cycle swings towards an extreme, this movement gives it energy which is stores. Eventually it stops moving in that direction. Once it does, gravity then pulls it back in the direction of the midpoint, with the energy it has amassed powering the swing back, so on and so forth.

5. "Riskier assets produce higher returns". This view is usually misinterpreted. This formulation can't be correct, since if risker assets could be counted on to produce higher returns, they by definition wouldn't be riskier.

6. Risk is high when investors feel risk is low

7. The shakiest financings are completed in the most buoyant economies and markets. Good times cause people to become more optimistic, jettison their caution, and settle for skimpy risk premiums on risky investments. Further, since they are less pessimistic and less alarmed, they tend to lose interest in the safer end of the risk/return continuum. This combination makes the prices of risky assets rise relative to safer assets.

8. The Impact of the Credit Cycle

   1. There have been many examples where loose capital markets contributed to booms that were followed by famous collapses: real estate in 1989-92; emerging markets in 1994-98; long-term capital in 1998, the movie exhibition industry in 1999-2000; VC funds and telecommunications companies in 2000-01.

   2. In each case, lenders and investors provided too much cheap money and the result was over-expansion and dramatic losses.

9. Superior investing doesn't come from buying high-quality assets, but from buying when the deal is good, the price is low, the potential return is substantial, and the risk is limited. These conditions are much more the case when the credit markets are in the less-euphoric, more stringent part of their cycle.

10. Real Estate Cycle

    1. When prosperity and wealth is rising, there's usually an increase in demand for homes, leading to an increase in prices of homes - and increases in the availability of mortgage financing to home buyers. This causes a housing shortage to develop, as demand for homes increases relative to supply.

    2. All this encourages the construction of new homes to meet the demand. Eg: A homebuilder might conclude that there is unmet demand for 100 homes in his town. Out of caution, he decides to build just 20 new homes. But what if 10 other homebuilders make the same decision? Now, 200 homes will be built. The new homes may now go unsold or sell for lower prices.

11. Three stages of a bull market (inverse for bear market)

    1. First stage: When only a few unusually perceptive people believe things will get better.

    2. Second stage: When most investors realize that improvement is actually taking place.

    3. Third stage: When everyone concludes things will get better forever.

12. "What the wise man does in the beginning, the fool does in the end".

13. "Being too far ahead of your time is indistinguishable from being wrong." In the 1990s, many concluded that tech stocks were overvalued and were due for a correction. They were right, but the correction happened many years later.