Understanding cycle theory is still one of the most important things an investor can do.
Buying at the peak is a surefire way to increase your downside risk – even if your investment is sound. And buying at the bottom gives you a thick margin of safety – downside protection.
That’s why the best investors pay so much attention to where they are in the cycle.
The value-investing contrarian who runs Oak Tree Capital – Howard Marks – has written about the importance of cycles.
In fact – in his book, The Most Important Thing Illuminated, he writes two key rules. . .
“Rule number one: most things will prove to be cyclical… Rule number two: some of the greatest opportunities for gains and loss come when other people forget rule number one…”
And I fully agree with him. . .
There’s a powerful indicator that shows global economic expansion and contraction – it’s known as the ‘Global Wave’ (GW).
And going back the last 30 years – within a year of when things peak (top), there’s either a recession or some market crisis. And when there’s a trough (bottom), it’s followed by growth and gains.
Today – the Global Wave indicator’s signaling economic growth has peaked for this cycle. And both markets and economies are going to underperform for at least the next 12 months.
To be fair – some post-market peak downturns were brief and didn’t result in huge market sell offs. But the ones that did – like the 2001 and 2009 recessions – were brutal.
That’s why we need to ask ourselves a very important question: what’s most likely to happen over the next 12 months – is the Global Wave Indicator just noise(useless) or is it a signal(useful)?
If we look at the history of the GW, it’s not hard to see that things are most likely going to go down from here. . .
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