Mastering the Market Cycle: Where Are We Right Now?

The question nobody can answer

Somebody asks you where the market is going this year.

You have already heard nine answers. One says it doubles. One says it halves. Both sound certain. Both have charts.

Howard Marks spent fifty years in markets. His answer is that he does not know. He also says nobody else knows, including the people on television and the people managing billions.

That sounds like a book that ends on page one. It is actually where his book begins, because he thinks we are asking the wrong thing.

Marks does not claim the left road is hard. He claims there is nothing at the end of it. So he walks the other way, and the rest of the book is what he finds there.

The rest of his book is about the second question. So is the rest of this article.

A market is not an economy

Marks starts with something odd.

Economies are slow. They grow a little each year. They shrink a little in a bad year. They rarely shock anyone.

Markets are not slow at all. They soar and they crash. And they do it around an economy that barely moved.

Why the gap? Because a market is not an economy. A market is a room full of people guessing about an economy. And people exaggerate.

Something improves slightly. People decide it will improve enormously. So they pay more. The higher price then convinces the next person that things really are getting better. So that person pays more still.

Then the whole thing runs in reverse.

The wave crosses the middle line constantly. It almost never rests there. Marks makes a great deal of this point.

Look at the middle line. That is “fair value”, the sensible price. Now notice how little time the wave spends on it.

This is the most useful picture in the book. It does not predict anything. It just removes a wrong idea that most of us carry around, which is that markets are normally sensible and occasionally go mad. Marks says it is the other way round. A market is normally somewhere other than sensible.

It has happened before. Many times

You do not have to take his word for it. The same shape keeps showing up.

These squiggles are shapes, not measurements. They are drawn the same height for clarity, which is not a claim that these episodes were the same size. Look up the details of any one of them; they are all thoroughly documented.

Every one of those is public history, written about in hundreds of books. The assets change completely. Tulip bulbs, shipping shares, houses, internet companies. The story does not change at all.

Something rises. People explain why this time is different. Money becomes easy to borrow. More people join, many of them borrowing. Prices stop making sense against anything the asset actually earns. Then confidence turns, the borrowing stops, and the fall is much faster than the rise was.

India has its own entries in that list. The securities scam of 1992 and the market collapse that followed it are among the most examined events in Indian financial history. So is the sharp fall in 2000 and 2001. If you want to understand cycles using examples you grew up hearing about, those are well documented and worth an evening each.

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History doesn't repeat itself, but it does rhyme.

The details differ every time. The shape does not, because the shape is made of people, and people have not changed.

Where to look in India

Marks says the reading is available to anybody who looks. Here is what looking means in this market, and none of it costs money.

Not one of these three is a chart, and that is deliberate. Every signal Marks cares about arrives as ordinary language in public documents, which is why a reader with no terminal and no subscription is not at a disadvantage here.

Start with the RBI. It publishes what it thinks, at length, several times a year. You are reading it for one thing only: is it worried that lending is growing too quickly, or is it trying to encourage more of it? That single question is most of the credit cycle, stated by the institution with the best view of it.

Then look at who is raising money easily. New listings, and who is getting funded. When businesses that would have struggled to raise anything two years ago are being funded comfortably, that is the same observation Marks makes about lenders competing, arriving through a different door.

Then count the newcomers. India publishes how many new demat accounts are being opened, and mutual fund inflows are reported every month. You do not need the figures. You need the direction, and whether the people around you who never discussed shares have started.

There is an Indian wrinkle worth knowing. A large and growing share of the money arriving here comes in on a fixed monthly schedule rather than on a decision. Money that arrives whether people feel confident or not behaves differently from money that arrives because they do, and nobody yet knows how that behaves through a long fall, because it has not been tested through one at this size.

Two episodes are worth an evening each, and both are documented in hundreds of places. The securities scam of 1992 and the collapse that followed it. And the 2018 squeeze in non-bank lending, which is the credit loop in this article running at full speed in living memory.

Up the stairs, down the lift

There is one more thing those episodes share, and it is worth its own picture.

Markets go up slowly and come down fast.

A price chart draws both moves with the same kind of line, so this difference is easy to miss. It matters, because it is the reason people who plan to sell near the top usually do not manage it.

The rise gives you years to get comfortable. It rewards you for staying, again and again, until staying feels like the obviously correct decision.

The fall gives you nothing. It arrives in weeks or months. Most people who meant to sell near the top never do.

The reason is cruel. The pattern that taught them to stay is the same pattern that punishes them for staying.

Marks does not promise to fix this. He says knowing about it is worth something on its own.

The thing you can actually see

Now we hit a problem with everything above.

Marks says the cycle is driven by how people feel. Fine. But you cannot measure feelings. There is no dial on the wall reading “greed: 74%”. Every attempt to build one ends up measuring prices and calling it a mood.

So if feelings drive the cycle, and feelings cannot be seen, is the whole idea useless?

This is the turn in the book. It took me a second reading to catch it.

Feelings leave a trail. The trail is money being lent.

You cannot see confidence. But you can see whether a weak business managed to borrow money this month. That is not an opinion. Either the loan happened or it did not.

This matters more than it sounds, because borrowed money is what turns a feeling into a price. Excitement on its own is a conversation at a wedding. Excitement plus a loan is somebody actually buying. And buying is what moves markets.

1. 1

   A few good years pass. Lenders lose very little money.
2. 2

   Losing nothing makes lending feel safe, so lenders compete for borrowers.
3. 3

   You win that competition by lending faster, cheaper, and to weaker borrowers.
4. 4

   Weak borrowers now have money. They keep going, so their problems stay hidden.
5. 5

   Conditions turn. The weakest borrowers fail, and they fail at the same time.
6. 6

   Lenders stop lending, which pulls the money out from under everyone else.

↺Now assets are cheap and nobody will touch them. That is exactly the condition which starts the next good run.

Each step causes the one below it. This is why Marks watches lenders instead of headlines. By the time trouble reaches the news, step five has already happened.

India saw this loop run in 2018, when a large infrastructure lender defaulted on its debts. The trouble did not stay in one company. Lending across the whole non-banking finance sector tightened sharply, and businesses that had been borrowing comfortably for years suddenly could not. Those businesses had not changed overnight. The money had.

That is the part worth remembering. When lending dries up, problems that were there the whole time become visible together, and it looks as though they appeared from nowhere. They did not. The borrowed money had been covering them.

Reading the room

So what does Marks actually want you to do?

Look around, honestly, and answer some simple questions. Not questions about prices. Questions about people.

Notice there is no needle. Every sentiment meter you have seen points somewhere, which quietly promises the reading is a known number. It is not. You look at the room and you decide, and you can be wrong.

Every row is about today. You can check all six this evening. None of them asks you to know anything about next year.

The fifth row deserves a pause. “The old rules don’t apply now” is sometimes true. Occasionally things really have changed. But Marks noticed that the sentence appears most often near the extremes. It appears then because it is the argument you need when the old way of valuing something can no longer justify the price. He is not telling you the sentence is always false. He is telling you to notice the moment you start needing it.

The last row is the one an Indian reader will recognise fastest. After a market has been rising for a while, new investors arrive in large numbers. Apps reduce buying to about four taps. Many of the people arriving have never seen a falling market. That is not a criticism of them, because everyone starts somewhere. It is simply information, and it is free.

What to do with your answer

Suppose you look around and decide things look frothy. Now what?

The obvious answer is to sell everything. Marks says no, and his reason is neat. Selling everything is itself a prediction. It only works if you know when to come back, and knowing when is the thing he has just spent a whole book saying nobody can do.

His answer is smaller and much duller.

The numbers below are invented round figures. They exist only to show the shape of the idea.

In the marketHeld back

Things look cheap and everyone is gloomy

₹90,000 / ₹10,000

Leaning in, while most people will not.

Things look normal

₹70,000 / ₹30,000

Where you sit most of the time.

Things look expensive and everyone is excited

₹50,000 / ₹50,000

Leaning back, while most people lean in.

Look at what is missing. No row sits at zero, and no row sits at everything. Even the most cautious reading still leaves half the money invested.

That narrow range is the whole design, and it is easy to mistake for timidity.

It is not timidity. It is built on the assumption that your reading will often be wrong. A method that only survives when you read the room correctly is not a method. It is a bet.

The part that costs you

Marks is unusually honest about where his own idea hurts. Skipping that would be selling you something he is not.

Being early looks exactly like being wrong, and it lasts a long time.

A market that looks expensive can stay expensive for years. Through all those years, you own less than everyone else. You earn less than everyone else. You have no proof you are right. And you watch people who ignored the whole idea do better than you. Most people cannot take that. They give up somewhere around year three.

This is the honest picture. Not clever timing, and not a neat exit near the top. Mostly it is standing still while a crowd runs past you in both directions, for longer than feels reasonable.

Three more problems are worth naming.

The reading is a judgement, not a number. Two careful people can look at the same market and reach opposite conclusions. Neither can be proved wrong for years. That makes this method very easy to use as decoration for whatever you already wanted to do.

It says nothing about what to buy. The book is about how much, not which one. You can read the cycle perfectly, choose badly, and still lose money.

And it asks you to do the thing it has just explained you are built not to do. Marks spends chapters showing why people turn brave at the worst moment. Then he asks you to be the exception, using the same brain he has just described. He never really solves this, and I think he knows it.

A practical checklist

Marks gives you a way of reading rather than a set of moves, which makes it easy to agree with and hard to use. This is what his reading actually asks somebody to have answered.

Things you can look up this week

7

None of this costs money, and none of it tells you what to buy. It is all reading and writing.

• Search for the latest RBI monetary policy statement. Does it sound worried that lending is growing too fast, or is it asking for more?That one question covers most of what Marks actually watches.
• Open any business news site and look at who raised money this month. Are shaky companies getting it easily?When money is easy, even weak businesses get funded. That is the tell.
• Ask two people you know who never talk about shares. Are they asking you what to buy, or have they gone quiet?It is free, it is today, and no data company sells it.
• Write one sentence about the mood around you. Put the date on it. Have you saved it where you will find it again?In six months you will not remember. The note will.
• Find one line in the news saying the old rules do not apply any more. Was it easy to find?Sometimes it is true. It turns up most often near the extremes.
• Look at your own plan. Does any part of it go to nothing, or to everything?Going all the way out only works if you know when to come back.
• Write down the one thing that would show your reading was wrong. Is it written?A reading that nothing could disprove is just an opinion.

Nothing here says what to buy or sell. Every line is something to look up or write down.

None of those needs a paid service. Four of them need nothing but a pen and ten minutes, which is roughly the point he keeps making.

What is genuinely worth keeping

You do not have to adopt any of this to get value from the book. Three things survive on their own.

Notice the temperature around you. When people who never discussed shares start asking which one to buy, that is information. When the same people go quiet, that is also information. Neither tells you what happens next. Treating either as a signal to act would be the exact prediction Marks refuses to make.

Watch how easily money is being lent. It is the part of the mood that leaves evidence, and you can follow it from ordinary business news.

Think in dials, not switches. Whatever you decide about any particular market, the habit of adjusting slowly beats the habit of jumping. That one survives even if you throw out everything else in the book.

Check yourself

4 questions

Answer in your head first. Guessing and being wrong still helps you remember.

1. 01Why does Marks say forecasting the market is a waste of effort?Show

   Because a market is millions of people reacting to each other. There is no stable rule underneath a system like that, so there is nothing consistent to discover. He is not saying it is difficult. He is saying there is nothing there to find.

2. 02Marks says psychology drives the cycle. So why does he watch lending instead of psychology?Show

   Because you cannot measure a feeling, but you can observe a loan. Whether a weak business raised money this month is a plain fact. Lending moves with the same mood, so it gives you a visible trace of an invisible thing.

3. 03Why does he refuse to sell everything, even when a market looks expensive?Show

   Because going to cash is a forecast in disguise. It only works if you know when to return, and knowing when is the exact thing he says nobody can do. So he changes how much he owns instead, and always owns something.

4. 04What is the biggest practical cost of using his method?Show

   Time. A market that looks expensive can stay expensive for years, and through all of them you earn less than people ignoring the idea, with no proof you are right. Most people abandon it during exactly those years.

Credit where it is due

Every idea above belongs to Howard Marks. It comes from Mastering the Market Cycle: Getting the Odds on Your Side, published by Houghton Mifflin Harcourt in 2018. He worked most of it out earlier, in the investor memos he has written since 1990 and in The Most Important Thing (2011).

An article cannot carry what makes the book good. Marks builds his case slowly, across cycles he lived through and decisions he actually made, and the weight comes from that accumulation. He is also funnier and far more self-doubting than any short version can show. That self-doubt is the point. It is the proof that he means the part about nobody being able to predict.

If anything here was useful, it came from him. The book is worth buying.