Cycle Book Review 00:0009:16
【Editor's Note】
The once-in-a-century epidemic has greatly changed our lives today and increased our confusion about the future.
How to understand the current economic and asset price fluctuations? How should ordinary investors protect their wealth at this moment? Looking back at history, we may find the answer when we go back to the classic books.
Industrial Securities Global Fund launched the reading column "Reading At this time", inviting fund managers to recommend good books worth reading for investors at the moment, and share book reviews with you.
The second book is the "Cycle" recommended by Lin Cuiping, the proposed fund manager of the Xingquan Shanghai-Hong Kong-Shenzhen two-year holding fund.
【Recommended】 Lin Cuiping
Investment is actually predicting the future, we can not accurately predict the market, but we can understand the current market position, the probability of possible development, make a comprehensive assessment and corresponding preparation. Allocate a portfolio for what is likely to happen in the market in the coming years.
Valuation level is the result of investors' minds, changing from time to time, and it is also a place where investors are often lost. The book "Cycle" provides a good way of thinking, how to judge the market, let the probability be on their side, actively invest when the probability of success is high, and be cautious when the probability of success is low, and improve the winning rate of the portfolio.
【Book Review】
"The cycle is definitely going to fall on your head, and you can't change it. How you take action to deal with it is the crux of the matter. ”
After "The Most Important Thing to Invest", "Cycle" is another masterpiece of Howard Max, the value investment master that Buffett praises, and the co-founder of Oak Capital, a well-known investment company in the United States. OakTree Capital's Q1 2019 investment report data shows that from October 1988 to March 2019, the company's annualized return in the past 30 years reached 18.8%.
If you want to summarize the book "Cycle", you can probably use this sentence: The cycle always exists. We fail to invest, often because we feel that "this time is different", but only afterwards do we find that this time is the same, the cycle will always exist, "history will not be simply repeated, but it is always surprisingly similar".
Before we walk into this book, we need to understand the question: Why understand cycles?
In fact, the essence of investing is to bet on uncertainty. It's like a jar with 100 balls, some black, some white, and a person takes a ball out of the jar and bets on what color it is. If you don't know anything about what's going on in the jar, you might think it's a 50% win-win bet because there are only two possibilities for the outcome: black ball and white ball. However, if you know that there are 70 black balls and 30 white balls in this jar, your bet will be more accurate because you know the real win side better.
If we understand the law of cyclical reincarnation and understand where we are now, we have the opportunity to invest in the trend with a high probability. When winning is in our favor, we can improve the offensiveness of the investment, and when winning is against us, it will further enhance the defensiveness of the portfolio. This is the role of understanding the cycle, that is, maintaining a "sense of cycle" and finding certainty in uncertainty.
The following is a mind map produced by the Cimbledox Global Fund based on this book, which is the overall framework for the author's research on the "cycle problem".
01 There will be a big rise after the big fall?
Howard believes that the so-called cycle is that asset prices fluctuate around the center line in the long run, and in the short term, they often appear to be extreme, alternating between big falls and big rises.
A full cycle will go through eight stages: recovery (a) → rise (b) → topping (c) → reversal (d) → down (e) → bottoming out (f) → recovery again (g) → rising again (h).
This description is indeed very close to the real situation. He statistically found that in the 47 years of his investment career, the average annualized return of the S&P index in 47 years was 10%, but in retrospect, only 3 years were near the center line (8%-12%), and the other 44 years were far from the center line and deviated from the extreme.
02 The root of the cycle is human nature
Why do markets fluctuate cyclically? The key lies in one word – "people".
Howard divides the various types of cycles into three levels, namely fundamentals, psychology and markets. All three levels have varying degrees of periodicity, and all are related to human behavior.
For example, economic fundamentals, when people are optimistic about the future, entrepreneurs actively invest, and consumers open their wallets to consume, the economy will develop in a good direction. But when people are shrouded in bad news and pessimistic about the future, everything will turn around and the economy will enter a downward cycle.
Another example is the cyclicality of the psychological side, which is clear from people's attitudes towards stock investment. As the saying goes, "three yang lines convert faith". When stock prices rise sharply, people become very optimistic and begin to take risks; when the market falls one after another, people's psychology becomes cautious, as if the decline will never end.
In the book, Howard points out that in the real world, our evaluation of things takes a place between "very good" and "not so good", but in the investment world, what we usually feel is either "good to perfection" or "hopelessly bad".
The emotions of market participants always move between greed and fear, which is why asset prices tend to go overboard and cycles repeat themselves.
03 The Secret of Oak Capital's Victory
With cycles implicated in each other's fluctuations, how does Howard-managed OakTree Capital capture investment opportunities amid complex cyclical changes?
Howard Marks points out that observing how assets are priced and how other investors behave is the secret to coping with cycles.
Howard gives an example of "bucking the trend" in investing. After the bankruptcy of Lehman Brothers in 2008, the market generally fell into pessimism, and at this time, the psychological "pendulum" of investors went to a pessimistic extreme.
But Oak Capital has been buying for 15 consecutive weeks, and the market has been falling for 15 weeks. By the beginning of 2019, the market slowly calmed down, and for investors, it is too late to think about buying in large quantities without pushing up market prices.
No one can really predict the bottom of the decline, because only after the bottom has passed can it be confirmed that it is the lowest bottom, and the time to buy correctly is when the price is already below the intrinsic value, because after that, the power of the cycle will begin to work.
Therefore, Howard particularly emphasized that "after a wave of decline, selling out of the market, so that it can not participate in the subsequent cyclical rebound, is a big investment taboo."
04 How do ordinary investors grasp the cycle?
Analyzing the cycle and responding to it rationally is the secret to Oak Tree's success. So for ordinary people, how to layout the portfolio?
If the market is at a cyclical high, then investors should emphasize limiting the risk of losing money, and the portfolio should emphasize more defense
If the market is at a low level of the cycle, then investors should focus on avoiding missed investment opportunities, and more emphasis should be placed on offense.
This is the book's advice for the average investor. In fact, there is one of the simplest but most effective ways to judge what cycle the market is in, that is, to "observe" others, that is, to feel the emotions of the market.
When people around them are careful to dampen optimism, stock prices tend to reasonably reflect their intrinsic value.
When investors become fanatical and keen to chase up and buy, it is a signal of the high level of the cycle.
And investors in the frustrated, panic selling, easy to make the stock fall over the low valuation, but also closer to the cycle of the low.
Of course, in addition to qualitative feelings, there are quantitative "market assessment guide" charts in the book, and it is easier to judge the position of the cycle through the comparison of items.
05 Summary
To sum up, the book "Cycle" believes that whether it is the subjective attitude or emotion, or the objective trend of economic fundamentals, these have their potential cycles and are mutually causal. Because we are in the middle of a ubiquitous cycle, there will be a saying that "the wealth of life depends on Kangbo", and if you are lucky enough, grasping a cyclical big opportunity may help you achieve financial freedom.
Of course, using the cycle is not easy, but we can still try to observe and understand it. If you are confused about the price fluctuations of real estate or the stock market for a period of time, you may wish to read the book "Cycle", understand the internal laws of the cycle and the logic behind the laws in the process of reading, and get rid of the microscopic feeling of "only seeing the trees and not the forest".
Text: Bai Jingxuan (Intern)
Risk Warning: Funds should be cautious when investing.