Investing is actually predicting the future. We cannot accurately predict the market, but by understanding where the market is currently located, we can make a comprehensive assessment of the probability of a possible direction of development and make corresponding preparations. Allocate an investment portfolio for what is likely to happen to the market in the next few years.

The valuation level is the result of investors' minds. It changes from time to time, and it is also a place where investors often get lost. The book “Cycle” provides a good way of thinking about how to judge the market, let the chances stand on your side, actively invest when the chances of success are high; guard carefully when the chances of success are low, and increase the winning rate of your portfolio.

-[Recommended words] Lin Cuiping, the proposed fund manager of the Xing Quan Shanghai-Hong Kong-Shenzhen Two-Year Fund

“The cycle will definitely fall on you; there's nothing you can do to change it. How you act to deal with it is the crux of the problem.”

Following “The Most Important Thing to Invest in,” “Cycle” is another masterpiece by Howard Max. This value investment master that Buffett has praised is the co-founder of Oak Capital, a well-known American investment company.

If I were to sum up the book “Cycles,” I would probably use this sentence: Cycles always exist. We often fail to invest because we think “this time is different,” but only later discovered that this time is still the same. The cycle lasts forever. “History doesn't simply repeat itself, but it's always strikingly similar.”

Before we dive into this book, we need to understand the question: Why do we need to know about cycles?

In fact, the essence of investing is betting on uncertainty.It's like a jar containing 100 balls. Some are black balls, some are white balls. One person takes a ball out of the jar and makes a bet on what color it is. If you don't know what's going on in the can, you might think this is a 50% win game since there are only two possible outcomes: a black ball and a white ball.However, if you know that there are 70 black balls and 30 white balls in this can, your bet will be more accurate because you know more about the real winning side.

If we understand the rules of cycle rotation and understand where we are now, we will have a chance to probably invest according to the trend. When a win is in our favor, it can increase the aggressiveness of an investment, and when a win is against us, it makes the combination more defensive. This is the role of understanding cycles, that is, having a “sense of cycle” and finding certainty in uncertainty.

The following is a mind map created by Xing Securities Global Fund based on this book. It is the overall framework for the author's research on “cycle issues.”

01 Will there be a sharp rise after a sharp drop?

Howard believes that the so-called cycle isAsset prices fluctuate around the center line and down in the long term, but in the short term they often go to extremes.It alternated between a sharp drop and a sharp rise.

A complete cycle will go through eight stages: recovery (a) → rise (b) → peak (c) → reversal (d) → decline (e) → bottom (f) → recovery again (g) → rise again (h).

This description is indeed very close to the real situation. Through statistics, he discovered that in the 47 years of his investment career,The average annualized return of the S&P index in 47 years was 10%, but looking back, only 3 years fell near the center line (8% - 12%)The other 44 years were all far from the center line and deviated to the extreme.

02 The root of the cycle is human nature

Why do markets fluctuate cyclically? The key word is “people.”

Howard divided the various cycles into three levels, namely fundamentals, psychological aspects, and market aspects. All three levels have varying degrees of cyclicality, and they are all related to human behavior.

For exampleEconomic fundamentalsWhen people are optimistic about the future, entrepreneurs actively invest, and consumers open their wallets to spend, the economy will develop in a positive direction. But when people are shrouded in bad news and pessimistic about the future, everything will turn the other way around, and the economy will enter a downward cycle.

Another examplePsychological cyclicalityIf you look at people's attitudes towards stock investment, you can understand. As the saying goes, “Three positive lines change faith.” When stock prices soar, people become very optimistic and begin to dare to take risks; and when the market falls one after another, people become cautious again, as if the decline will never end.

Howard pointed out in his book that in the real world, our evaluations of things will take a position between “very good” and “not that good”, but in the investment world, what we usually feel is either “good enough to be perfect”, or “there is no remedy for bad.”

Market participants' emotions always drift between greed and fear, which is why asset prices tend to overstep, and the cycle repeats.

03 The Secret to Oak Capital's Winning Success

Cycles are linked to fluctuations. How does Oak Capital managed by Howard seize investment opportunities in the midst of complex cycle changes?

Howard Marx pointed out that watching how assets are priced and how other investors act is the secret to coping with the cycle.

In the book, Howard gave an example of “bucking the trend” of investing.After Lehman Brothers went bankrupt in 2008, the market generally fell into pessimism. At this time, the “pendulum” of investors' mentality reached the extreme of pessimism.

However, Oak Capital has continued to buy for 15 weeks in a row, and the market has been declining for the past 15 weeks. By the beginning of 2009, the market slowly calmed down. For investors, it was too late for investors to buy in large quantities at this time without pushing up market prices.

No one can actually predict the bottom of the decline, because only after the bottom has passed can it be confirmed that it was the lowest bottom. The correct time to buy is actually when the price is already below the intrinsic value, because after that, the force of the cycle will begin to work.

As a result, Howard placed special emphasis on “after a wave of decline, selling leaves the market, so not being able to participate in the subsequent cyclical rebound, which is a big investment taboo.”

04 How can ordinary investors grasp the cycle?

Analyzing the cycle and responding appropriately is the secret to the success of Oak's investment. So for ordinary people, how should they lay out their investment portfolios?

If the market is at a high point in the cycle, then investors should emphasize limiting the risk of losing money, and investment portfolios should place more emphasis on defense

If the market is at a low point in the cycle, then investors should focus on avoiding missing out on investment opportunities, and they should put more emphasis on offense.

This is the book's advice for the average investor.However, to determine what cycle the market is in, there is actually one of the easiest but effective methods, which is to “observe” others, that is, to feel the mood of the market.

When everyone around them is careful and careful operation to curb optimism, stock prices tend to reasonably reflect their intrinsic value.

When investors become fanatical and keen to buy higher, it is a sign of a high cycle.

However, when investors are depressed, panicking sell-offs can easily cause stocks to fall past undervaluation and closer to cyclical lows.

Of course, in addition to qualitative feelings, the book also contains quantitative “market evaluation guide” charts. By comparing each item, it will be easier to determine the position of the cycle.

05 Summary

In summary, the book “Cycles” argues that whether it is subjective human attitudes or emotions, or objectively trends in economic fundamentals, these all have potential cycles, and are the cause and effect of each other. Precisely because we are in an ubiquitous cycle, there is a saying that “life's wealth depends on health”. If you are lucky enough, seizing a big cyclical opportunity may help you achieve financial freedom.

Of course, using the cycle isn't easy, but we can still try to observe and understand it. If you are puzzled by price fluctuations in real estate or stock markets over a period of time, you might as well read the book “Cycle”, understand the internal rules of the cycle and the logic behind the rules in the process of reading, and get rid of the microscopic feeling of “only seeing trees, not forests.”