How to position your investment portfolio based on market cycles. Investing principles from Howard Marks’ new book Mastering the Market Cycle.
In this episode you’ll learn:
- How have U.S. stocks performed relative to non-U.S.
- How to position investment portfolios based on cycles.
- What is asset selection and why there are more opportunities in extreme times.
- How luck and skill play a roll in investing.
Learning how to read the market cycle is a mix of art and science that’s impossible to perfect. However, on this episode of Money For the Rest of Us, David shares his key insights from Howard Marks’ new book, “Mastering the Market Cycle,” and outlines key strategies to keep in mind when investing. He explains two tools you can use to invest smartly no matter what the market cycle is doing, and why investing will always involve some risk. Be sure to listen to this episode for the full story.
Great investing requires a mix of luck and skill – both of which can be unpredictable
In the book, Marks defines investment skill as “the ability to make decisions, these positioning decisions regarding cycles and asset selection, so that you generally are on balance, correct, (although not in every case), and do so with a repeatable intellectual process, and on the basis of reasonable assumptions regarding the future.” Luck with investments during a market cycle, however, comes into play when even reasonable assumptions simply don’t work out the way they were planned. The key difference between these two ideas revolves around the long-term sustainability of each. Historically, investors who rely on skill succeed more in the long-term, compared to “lucky” investors that see dramatic, yet short-term, gains.
Tool #1 – Determining whether to take on an aggressive or defensive investment position
To pursue investment strategies that are skillful, David summarizes two main tools that can be leveraged. The first is choosing to use an aggressive or defensive investment position. Marks writes, “There are three ingredients for success (investing success): Aggressiveness, timing, and skill. And if you have enough aggressiveness at the right time, you don’t need much skill.” He continues by explaining that market cycle positioning is “The process of deciding on the risk posture of your portfolio in response to your judgments regarding the principal’s cycles. And cycles are patterns.” By learning how to understand investor psychology and economic and market trends you can start to determine your own mix of investment positions.
Tool #2 – Learning which types of assets to select and invest in
The second tool is comprised of asset selection. Marks explains this concept as, “The process of deciding which markets, market niches, and specific securities or assets to overweight and underweight (in your portfolio.)” The best asset selection comes from understanding an asset class’ intrinsic value, any future changes in that value, and the relationship between the intrinsic value and its current market price. To learn how to implement this asset class knowledge in either a passive or active way, be sure to give this episode your full attention.
“Waiting until the dust settles” in a market cycle may result in missed opportunities
Luck, skill, and knowledge can only take you so far in investing. The last major variable that David and Marks both take note of is timing. In every market cycle, there are periods of extreme events (i.e. the recession of 2008 or the internet bubble) that cause huge shifts in investments. The key to being a savvy investor is learning how to act swiftly, confidently, and with reasonable assumptions when the timing is right.
Marks’ book is filled with great insights, and David encourages you to take a look at his works for yourself. It will be well worth your investment of time and effort.
- [0:11] Howard Marks’ new book is the inspiration for this episode of Money For the Rest of Us
- [7:13] The first tool in learning how to invest during a market cycle
- [11:49] The second tool in learning how to invest during a market cycle
- [18:00] Great investing requires a mix of skill and luck
- [25:30] There’s no way of knowing where the bottom of a market may be
- [26:30] We are not in a period of extreme risk or opportunity in today’s US economy
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