Mastering the Market Cycle by Howard Marks — review and summary

Howard Marks is the co-founder of Oaktree Capital Management, one of the world's largest alternative investment managers, and the author of the widely read Oaktree memos that he has been distributing to investors since 1990. Mastering the Market Cycle is his most sustained attempt to systematise one of the central ideas in those memos: that understanding cycles is the most reliable way to tilt investment odds in your favour.

The argument about cycles

Marks's claim is not that market cycles are predictable in the sense of knowing when they will turn. His more modest and more useful claim is that cycles have consistent psychological and economic signatures, and that an investor who understands those signatures can make reasonable judgments about where in a cycle the market currently stands.

Those judgments do not tell you what the market will do next week. They do affect how much risk is appropriate to take. At certain points in a cycle — when assets are expensive, when optimism is extreme, when lending standards have loosened, when the crowd is enthusiastic — prudence calls for less risk. At other points — when assets are cheap, when pessimism is pervasive, when capital is scarce — the same logic calls for more.

Marks frames this as positioning rather than prediction. You cannot know when the market will turn. You can position yourself appropriately for where you are.

The psychology chapters

Some of the most useful material in the book covers the psychological dimension of cycles. The alternation between fear and greed is a cliché; Marks is more specific about the specific patterns — the way optimism builds, the way risk is progressively underpriced, the way standards loosen at peaks, the way the process reverses at troughs.

He is also honest about the difficulty of acting on this analysis in real time. Understanding that the market is at a peak does not make it emotionally easy to take less risk when everyone around you is making money. Understanding that it is at a trough does not make it emotionally easy to add risk when everyone is losing.

The psychological discipline required to act on cycle analysis is not given free by the analysis. It has to be built separately, and it is one of the things that distinguishes consistently good investors from ones who understand the theory but cannot execute it.

Limitations

Mastering the Market Cycle is not a book about how to identify specific investment opportunities. It is a book about positioning and risk management at the portfolio level. Readers looking for stock-picking frameworks will find it too abstract.

The book also covers ground that Marks has already covered in his memos. Readers who know the memos well will find significant overlap.

Who this book is for

This book is most useful for people with some investment background who are thinking about risk management and portfolio construction over long time horizons. It is accessible to non-specialists but will be most useful to readers who are already thinking seriously about markets.

Practical reflection prompts:

• In which areas of your life — financial or otherwise — do you tend to take more risk at peaks (when optimism is high) and less risk at troughs (when caution is high)?
• What would it mean to be genuinely contrarian, rather than performing contrarianism?

Bibliographic details

• Author: Howard Marks
• Published: 2018
• Publisher: Houghton Mifflin Harcourt