Why everybody in crypto should read Howard Marks of Oaktree Capital
Howard Marks is a typical fundamental driven investors in that he looks at fundamental economic trends, corporate development, competitive strengths stuff.
What is market cycle
However, that’s not why we should read his memo. Howard’s best gift for us is that he spent last 50 years looking at investor behaviors/psychology through cycles. And he has been actively taking advantage of these cycles. For example he entered the junk bond market when they were sold at extreme big discount when the rest of the market just wanted none of it.
A TL;DR of Howard’s theory is that market cycles are essentially
- Money cycles: central banks manipulate the growth of money and interest rate
- Investors mood cycles: Investors’ moods rarely stayed in the neutral zone. They tend to quickly alternate between extreme Bullist to hopeless Bearish.
Why understanding market cycles will help improve your investment?
By correctly identifying different stages of a bull market or a bear market, and also the cycles of your own psychology, it would help you hold onto these “core assets” or even adding more position on them during extreme fear.
It would also help to alert you when an asset is extremely over bought /over valued, and you can lower your position in these and switch to other investments with better potential.
On the Couch (January 2016), I wrote, “in the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot.’ But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless.’” The way things are seriously overdone in the markets is one of the key characteristics of investor behavior.
“the three stages of a bull market:
- the first, when a few forward-looking people begin to believe things will get better,
- the second, when most investors realize improvement is actually underway, and
- the third, when everyone concludes that things will get better forever.”
You need to be aware when your or the market’s Greed takes over and Prudence is long gone
I know, crypto investors are all dreaming of catching the next 100x bags. However, always check if prudence is protecting you and give you that moment “wait a minute, this does not make sense”.
In his latest memo Bull Market Rhymes, he wrote:
https://www.oaktreecapital.com/insights/memo/bull-market-rhymes
I don’t think investors are actually forgetful. Rather, knowledge of history and the appropriateness of prudence sit on one side of the balance, and the dream of getting rich sits on the other. The latter always wins. Memory, prudence, realism, and risk aversion would only get in the way of that dream. For this reason, reasonable concerns are regularly dismissed when bull markets get going.
Adopting the psychology of probability
It is not advisable to try to “time” the market i.e. try to buy at the very bottom, and sell at the very top. Because by definition psychology and macro economy in general are not very predictable. Marks has a piece on When is a good time to sell.
https://www.oaktreecapital.com/insights/memo/selling-out
Nobody can predict what will happen next. Instead, by buying when the market is in extreme fear and valuation are extreme depressed, you have better odds of making profit in the next 1 year or even longer. It does not guarantee a profit in next day.
It’s never too late to learn more on market psychologies
After all, history repeats itself because human natures stay unchanged for thousands of years.
Crypto as an asset class fits perfectly into a financial bubble framework (not that I am adivising not to touch them). I probably will write another piece on it. It will be fun.
