If there were a set of commandments for investing, the first commandment may well be this: know your seasons.
Just like a surfer or fisherman know the tides of their favourite spots, prudent investors know the market cycles.
“The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase,” says Investopedia. Many investors will come up with a strategy, and it may be a very good one, then with enthusiasm rush out into the marketplace and expect to impose their vision on the market or, in their excitement, misinterpret the signs.
This is like rushing out into a thunderstorm without an umbrella in a T-shirt, because you feel like sunshine. We all need to obey what the climate and environment is doing. A good investor is very much like a farmer, knowing that there is a time to sow and to reap, to keep store for lean months and times to feast as well.
The four seasons
Just like any other rhythm or cadence, markets tend to begin low, climb, reach a certain high point and then fall until a certain low point. Then the cycle begins again.
The four phases are generally referred to as accumulation, mark-up, distribution and mark-down in the financial industry. Allocation is the beginning of a new cycle, when prices are low and savvy buyers are buying. As things in the market settle and rally, the prices rise and this is mark-up. At the investment’s peak, when it has become the most valued and expensive it’s going to get, that’s called distribution because the savvy sell now. Those who don’t sell have to deal with mark-down, the fall from grace, when the investment loses its value as the cycle descends to begin anew and ride the next mark-up wave.
If they sound a bit like shopping around Christmas in fancy department stores, you’re right – stocks are a product and, just like any other product, have a marked-up price and a discount price. It’s wisdom to buy it ‘on sale’, wait until it’s in demand and then sell it for a higher price than you bought it for before it devalues as the next new thing comes in.
Know your animals, too
Then there’s also the global sentiment of the market: bullish or bearish, hawkish or dovish and for what reason. These are directly linked to the four phases. Currently, America is in a fragile, yet still-running, bull market – the longest bull market in history. Many a betting man would’ve lost his shirt by predicting, reasonably, that it would have ended a long time ago. But that’s how markets are – and we must be cognisant of them. It would be just as foolish to not take these into account as it would be to build your entire investment strategy around them.
A man for all seasons
There is a reason for the phrase ‘unpredictable as weather’, which should also be ‘unpredictable as markets’ – it can be famously hard to predict the exact right moment when an investment will reach its peak value, will start to decline or appreciate. The cycle is a law unto itself at times, just like climate patterns and weather – there are rules, but no one knows when there’ll be an exception.
If anything, the cyclical nature of all markets shows the need for good advice. Lean and fat times come and go, but your future security should not depend on it but rather get richer and mature with the seasons, just like you.