The Nature Of Cycles
Cycles present profit opportunities for those who understand, recognize, and take advantage of cyclical phenomena.
Phases of a cycle:
A.Recovery from an excessively depressed lower extreme, toward the midpoint.
B.The continued swing past the midpoint, toward an upper extreme or high.
C.The attainment of a high.
D.The downward correction from the high back toward the midpoint.
E.A continuation of the downward movement past the midpoint, toward the new low.
F.The reaching of a low.
G.Recovery from the low back toward the midpoint.
There cannot be said to be a single starting point or ending point for a cycle. Many of the phases above can be represented as the beginning or the end of the cycle.
The swing back from a high or low almost never halts at the midpoint.
Themes that provide warning signals in every boom/bust:
- Excessive optimism is dangerous
- Risk aversion is an essential ingredient for the market to be safe
- Overly generous capital markets ultimately lead to unwise financing and thus to danger for participants
Cycles have to be understood both analytically and intuitively. Those who possess both abilities will go the furthest.
We usually see only one major cycle per decade.
In a particular chapter of this book, 'The Regularity of Cycles', Howard enlightened on the fact that when something rises, people have a tendency to think it will never fall, and vice versa. Betting against those tendencies can be very profitable.