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  • Writer's pictureShekhar Yadav

Learning from the book “Mastering the Market Cycle” by Howard Marks

With the market cycle turning for the bad & then worse, I was very keen to learn how things work and what are the signs that we should look for. A very few books have been written on this subject. One among them is ‘Mastering the Market Cycle’ by Howard Marks. I will share the pointers in the blog ‘Learning from the book “Mastering the Market Cycle” by Howard Marks.

About the author: Howard Marks

Howard Marks is the co-founder of ‘Oaktree Capital Management’ founded in 1995, an asset management firm with an Asset Under Management of $120Bn.  

Oaktree specializes investment in distress debt situations. 

Howard Marks has a net worth of $2.1Bn and he is well known for his ‘Oaktree Memos’. I found them really educational helping me think from different perspectives. 

You can read more about him: Link1 Link2

You can subscribe to Oaktree memos here

Learning from the book "Mastering the Market Cycle" by Howard Marks

The theme of the book is to be attentive to Market cycles in order to outperform average returns. In order to do so, one must understand how these cycles work, where they stand in the cycle.  You might ask why market/economies/companies move in the cycle? The answer is “Human Psychology”. Economies, companies, and markets all operate in certain patterns and are interlinked.

A very reasonable analogy used by Howard Marks in the book is that “because the cycle exists, the trees don’t grow to the sky and only a few things go to zero”.

Why market, economies, companies & markets move in cycle

When you accept that everything moves in a cycle and listen to the top investors, you would get to see how much attention they pay to the pricing level of the market or where do they stand in the cycle. And that keeps them ahead of the rest.

In the book, Howard Marks says that however alert we are, we can judge the probabilities only to a certain extent. The accuracy of your ability to see the future will determine the excess return you can make. So, if suppose we think the market is expensive at a PE ratio of 25, it can goto 3o-35 and so on, but we should be alert in order to preserve our capital. We can start to book profits partially and be more attentive to the external environment.

And however good the fundamentals of the company, everything will be available at a fraction of the last top in the bear market.

Learning from the book "Mastering the Market Cycle" by Howard Marks​

The author points out several indications that can help us understand where do we stand in the cycle. In order to best make use of the cycle, we must have a neutral frame of mind. The below questions will help us understand where we stand?



1. Are we closer to the beginning of an upswing or we are in the late stages of the upswing?

2. With the continued upswing, has it reached a dangerous territory?

3. What does the market participants behavior suggest? Greed or Fear?

4. Are the market participants Risk-averse or Foolishly risk-tolerant?

5. Is the market Overheated/overpriced or Frigid/Cheap?

6. Based on the current stage of the market cycle, we should be defensive or aggressive?

1. Are the probability of economic/ corporate profit are more likely to swing upwards than downwards?

2. Is the investor psychology more sober rather than buoyant?

3. Are the investors risk conscious?

4. Are the Market prices low?

“Mastering the Market Cycle” by Howard Marks.

Another important aspect is to position your portfolio on the stage of the market cycle.                       Excessive risk Aversion-> Cheap->Strategy-> Aggressive 

 Excessive optimism-> Expensive-> Strategy->Defensive or in Cash

An image that I have picked from the web is representative of emotional tendencies at different point of the cycle:

Emotion at every stage of a market cycle

Learning from the book "Mastering the Market Cycle" by Howard Marks​

If we are passive to market cycles, we ignore the possibility to tilt the odds in our favor. And it is not that difficult to understand where we stand by looking at the questionnaire on the top.

Market Cycle explanation by Howard Marks

The midpoint or the fair value of the company/market exerts a magnetic pull to bring the price to the mid-level from the highs as well as bring it upward from the lows. Howard marks points that the influence which swings the cycle to mid-level invariably continue in force & thus cause the swing back from an extreme to proceed through the midpoint & then carry further towards the opposite extreme.

The outlook for returns is better when investors are depressed and fearful. When market participants think that nothing can change the current status, the hopefuls are rewarded i.e. those who understand how the cycles move. 

Post the dot com bubble in early 2000s, with the kind of wealth destruction, it was assumed that the economies will take at least a decade to recover but an unrelated sector started the move soon after the crisis and similarly post the Subprime crisis of 2008 which was much larger in scale, we had similar assumption but the recovery was much sooner in this case.

Closer in India in 2013, with the market going nowhere for 3-4 years, nobody would have thought the bull market will start just with the announcement of the opposition parties prime ministerial candidate. 

Contrary, during bull run we get greedy and want to make money till the last bit of the bull market and that’s when we get into trouble. We get very little time to sell at the top but ample time to buy at the bottom.

The air goes out of the balloon much faster then it went in

That is when the understanding of cycle can help us control our emotions.

History doesn’t repeat itself, but it does rhyme: Mark Twain

One should be wary of any event that suck out liquidity from the system/market. That is the common theme in all crisis. I will talk in details about it in a different blog.

Learning from the book "Mastering the Market Cycle" by Howard Marks​

Exiting the market after a decline & thus failing to participate in a cyclical rebound is truly the cardinal sin in investing – Howard Marks

Going through all the points, it makes much more sense to 

a) study & remember the events of the past 

b) be conscious of the cyclical nature of things

In the world of finance, cyclic nature is more frequent and more obvious than any other sector.

Every cyclic movement has the other side and the effect that causes the cycle, reverses it as well.

Cycles need to be understood both analytically & intuitively. Other than the valuation aspect, intuitively one needs to understand the market participants psychology to decide where we stand in the cycle. 

Timing the market is difficult but trying to understand top and bottom of the market are relatively predictable and helps better our returns.

Further reading:

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