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Cyclical Investing

Why choose cyclicals?

For the simple reason that you might be an adventurous person. Strictly speaking, the bandwidth of gains and losses is much higher in cyclical stocks. It is not uncommon for prices to go up 5x from the bottom to the peak of the cycle.

 

Let's have a look at how the two stocks we discussed previously have fared in 2020. Tata Steel shed more than half of its market capitalization during the fast and furious correction whereas Asian Paints was much more resilient and went down only by 20%. From their respective 52 week lows, Tata Steel has gone up by a whopping 240% whereas Asian Paints is up a mere 80%. 

 

This data does not intend to say that Tata Steel is a better stock than Asian Paints or vice versa. It just goes to show the point that defensives outperform in a bear market and cyclicals outperform in a bullish market, 

 

The investment mantra to go by- 

“The best time to get involved with cyclicals is when the economy is at its weakest, earnings are at their lowest, and public sentiment is at its bleakest" 
 Peter Lynch


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Units 6/11