On Pig Farming, Cobwebs and Howard Marks

I can guarantee a few things about Howard Marks’ new book, Mastering the Market Cycle. You will enjoy the thoughtful writing in clear language, and you will learn one great, and I believe correct, idea about the operation of markets.

But you will not master the market cycle. Nobody can.

What you can do, as part of a broader program of self-education in economics, finance, and investing, is to understand better why market prices seem to run in cycles, and market psychology swings between euphoria and despair with more or less predictable regularity. This book should be a part of that self-education strategy.

Ultimately, however, Mastering the Market Cycle is disappointing because it relies on repetition, rather than intellectual exploration, to teach one big idea: Market cycles are best understood as extremes of risk perception, not of price. When everybody thinks there is no risk in the market and that all will work out well, sell. When almost everybody thinks the market is almost infinitely risky and that nothing will work out well, buy.

That’s it. The idea is repeated as a general principle and specifically for high-yield debt (the asset class in which Marks, the founder of Oaktree Capital, made his first and best-known fortune), distressed debt, equities, and real estate. Sell when others are indifferent to risk; buy when there’s blood in the streets, said Nathan Mayer Rothschild (1777-1836). So says Howard Marks as well.