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Investing experts and laypeople alike often lament the unpredictability of the securities market—financial markets on which investments like stocks and bonds are sold. However, according to one of the world’s leading investors, Howard Marks, this belief in the market’s unpredictability is unfounded. In Mastering the Market Cycle, he argues that the securities market undergoes predictable fluctuations that depend on foundational business cycles and cycles in investor psychology that arise from those foundational cycles.

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Mastering The Market Cycle Summary Foundational Cycles

Marks writes that there are three foundational cycles that impact business prosperity (and consequently the value of securities): the economic cycle, the profit cycle, and the credit cycle. In this section, we’ll examine these three cycles to illustrate their underlying causes and their impact on securities.

The Economic Cycle

According to Marks, the economy experiences cyclical swings as it expands and contracts. These swings lead to long-term economic fluctuations due to shifts in productivity and net hours worked, as well as short-term fluctuations due to changes in spending patterns.

Regarding long-term change, Marks points out that the gross domestic product (GDP)—the value of all goods and services produced per year—varies depending on the total hours worked and the productivity of those hours. He explains that consequently, the GDP undergoes long-term swings due to changes in birth rate, as a higher birth rate at one point in time will cause a spike in total hours worked several decades later. In the US, for example, although GDP increases on average 2-3% per year, it’s subject to long-term cycles that mirror cycles in birth rates.

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Mastering The Market Cycle Summary Psychological Cycles

Having seen the foundational cycles that impact business prosperity, we’ll now discuss how oscillations in these cycles impact investors’ psychology. In particular, we’ll see how shifts in foundational cycles lead to a psychological cycle between fear and greed that in turn causes a cycle between risk tolerance and risk aversion.

The Cycle Between Greed and Fear

According to Marks, the psychological cycle that influences the securities market most is the cycle between greed and fear. He argues that the most promising parts of foundational cycles—such as economic growth, high profits, and easy access to credit—fuel investors’ greed, causing them to act imprudently, which in turn contributes to downswings in foundational cycles that increase fear.

(Shortform note: To track these fluctuations between greed and fear more precisely in the US stock market, financial experts developed the CNN Fear and Greed Index. This index takes various quantitative factors into account—such as stock price momentum, demand for junk bonds, and returns for treasury bonds—to provide an estimate of how greedy or fearful the average US stock...

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Mastering The Market Cycle Summary The Securities Market Cycle and How to Exploit It

Now that we’ve examined the foundational and psychological cycles that underlie the securities market cycle, we’ll outline how these cycles jointly drive the overall securities market. In particular, we’ll discover how the predictable nature of foundational and psychological cycles makes for a predictable securities market cycle that you can exploit to reap large returns.

What Drives the Securities Market Cycle?

According to Marks, the securities market cycle fluctuates in accordance with shifts in investor psychology that, as we’ve seen, depend upon underlying foundational cycles. He argues that positive investor psychology drives bubbles in which securities become wildly overpriced, leading to crashes in which they become underpriced.

As Marks has shown, initial upticks in foundational cycles—for example, a steady rebound in GDP or profits that slightly exceed projections—tend to cause a handful of investors to begin purchasing securities. Over time, as more people become aware of these upticks, more investors purchase securities. At this point, greed and risk tolerance begin to infiltrate the market as investors expect prices to rise indefinitely.

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Shortform Exercise: Assess the Current Market Position

Marks argues that exploiting the securities market cycle involves correctly assessing it and positioning your portfolio accordingly. In this exercise, practice assessing the securities market of your home country and consider adjustments to your portfolio.


Evaluate your current portfolio. Would you consider it aggressive or defensive? Why?

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