The Rough Guide to Surviving Market Cycles

Thursday, Jun 07 2012 by
The Rough Guide to Surviving Market Cycles

There are a few books that I turn to time and again which I find extremely useful, and a surprising number of them come from the 'Little Books, Big Profits' series published by Wiley. The reason I'm a fan of the series is that the format forces the often very smart authors to distil their thoughts into less than 150 pages. Such a format does away with the verbosity and in-the-know jargon that fills larger tomes leaving the author to focus on storytelling and ideas. One that's useful to read at difficult times like these is the Little Book of Sideways Markets. In the book the author, Vitaliy Katsenelson, describes at length how stock markets have a tendency to move in long wave cycles from extreme overvaluation to undervaluation and describes especially the strategies required to prosper during downwaves.

Redefining markets as bears, bulls and 'cowardly lions'

The real value that Katsenelsen adds in this short book is in providing a mental model to help investors think about what really drives the market over the long term. He makes the distinction between secular movements in the market which last from 5 to 15 years and cyclical movements which last from several months to several years. These cyclical bull and bear moves may be the prime focus of the media, but really they are just shorter term waves within broader secular trends.

Katsenelsen notes that these secular trends have tended to be long term bull and 'sideways' markets rather than bear markets.  He describes sideways markets as 'cowardly lions' given that every brave cyclical rally within them tends to turn and decline.  As shown in the graphic below, the last 100 years have seen 4 main bull markets, 4 sideways markets (each lasting 13 to 18 years) and one short secular bear market in the Great Depression - our current predicament is that of a Sideways market with a long way still to run.

PE ratios drive these trends

A simple equation to understand a stock's return is as follows:  Stock Return = EPS Growth + Change in P/E + Yield . Historically during bull and sideways market periods the level of EPS Growth and dividends haven't been much different - so the entire reason for the long drift upwards or sideways in price has been a result of the P/E multiple expanding and contracting.

During the long bull market from 1982 to…

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2 Comments on this Article show/hide all

Edward Croft 7th Jun '12 1 of 2

Just come across this excellent link on the same subject

We've only got to wait till 2016/2018 till the next major bull eh?


1. The long 10-20 year secular bear moves seem to have lots of major rallies and sell offs; the ups and downs are intense, but make little in the way of net progress. After 15 years, the average secular bear is essentially unchanged.

2. The roller coaster ride leaves investors psychologically exhausted. They come to forget the good times of so long ago, and believe there is no way out of the morass. Naturally, they are reluctant to believe in the new bull market once it begins.

3. The major bottom seems to occur about halfway through; this implies that the March 2009 lows will not be revisited (note I only wrote IMPLY and not guarantee or forecast!)  If we look at the current Bear versus the ’66-’82 (with lows like ’73-’74), it suggest that 8500-9000 on the Dow is possible, but barring another crisis 6500 is much less likely. And it also suggests that the next secular bull might begin around 2016-18.


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MadDutch 7th Jun '12 2 of 2

We don't have to wait Edward.
We are not retail investors piling into high markets and panic selling at the bottom. We know how to buy low and sell high, we can short falling markets and sell covered options. The last 4 years have been the best of my investing life, and I will not worry if the current market continues to 2016.

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About Edward Croft

Edward Croft


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