The Relationship Between Cycles and Investment

Investing is like being a stall owner in the cyclical food-service industry. You have to learn about it, but you can't rely on it.

Studying the tops and bottoms of cycles isn't difficult—anyone can do it. But the real question is: can you know how long the top will last, or how long the bottom will last? Sorry, you really can't. There's no way to know. Often, when we don't know the timeline, it's practically useless. Or to put it another way, it has reference value but no direct practical value.

Cycles are subject to disruptive shocks from unexpected events. Just as the overall direction of human history is certainly forward-moving—a statement that holds true from a millennium-long perspective—have there ever been backward steps? Of course there have. In European history, for example, the Middle Ages were dark for a full thousand years at a stretch. If your life happened to fall within that period, how would you view the claim that human history always moves forward? Your judgment of the grand cycle itself may be correct, but the problem is that your lifespan is limited. You won't live to see the cycle's turning point, so all you can do is tell your descendants, "When the time comes, don't forget to report this to me at the ancestral sacrifices."

Cycles exhibit resonance effects. For those who trade financial assets, this is common knowledge—everyone knows it, every player knows it. When most participants are on the same wavelength, it triggers a tragedy much like German soldiers marching in lockstep across a bridge during WWII. Everyone follows the same rhythm, and the bridge simply can't hold. Every investment strategy relies on having a counterparty: when you buy, someone must sell; when you sell, someone must buy. Otherwise, no trade can execute. But when the vast majority of players all buy at the same time, and then all sell at the same time, who are you trading with? That's the resonance caused by market consensus. Resonance distorts supply and demand, which in turn distorts prices, rendering strategies that might have been profitable into losing ones. Your original cycle call may have been correct, but the problem is that everyone else made the same call, and together they trampled that winning strategy—that bridge—right into collapse. When everyone nationwide adopts the same strategy, the resonance effect kicks in and there are no counterparties left. Think of real estate: when everyone buys a house, even those without money lever up to buy, your counterparties disappear. You can't find anyone who hasn't already bought a house—so who's left to take the other side?