So, when I was calculating the forces of heavenly bodies (as Newton put it) early in this morning where I have absolutely no interest, I was contemplating on the economic cycle. How long would a bust be? How long would a boom be? How long will the recovery be? So, this post not only will explain what those numbers meant, but also will set to explain what will I, as an investor, do in the corresponding stages.
My interpretation of an economic cycle is that it is usually carried out in a 8-year cycle form, but instead of the 10-year that you usually heard. How was my hypothesis formed? Basically, I looked into the strings of economic events that happened over the past two decades. In the early 1990s, we had the Gulf War, near meltdown of the pound system and meltdown of the Japan due to overexpansion. This lasted for roughly two to three years. (IE 2-1) . After that, the financial markets started to pick up significantly. From 1993-1998, it was peaking. Then, the dot com bubble was starting to get out of control. After struggling for two years, it finally bursted. So, it went back to the phase '2-1'. This also applied to the 21st Century.
When we looked into 21st Century, we had the dot com burst and 9-11 for the first 2 years. The SARS in 2003 hit the Asia markets brutally. (I.E. the phase 2-1) ; financial markets and property markets again picked up in 2004. Their momentum was approaching to the peak from 2005 onwards. The market was just outrageously vibrant from 2006 to 2007. This vibrant and prosperous era accounted for five years. (IE '5' ). We then knew what happened in 2008- the burst of US property market bubble, contributing to the bankruptcy of Lehmann Brother and again triggered a global financial crisis/ turmoil. This global economic slump lasted for two years. Then, the Euro-Crisis is the '1'. After 2011, the market gradually picked up its momentum( 2011-2013) , so, we are now talking about the '2' as in '2-3' phase. So, shall my hypothesis stands, we will be having a three-year bullish/boom market. There is always a reason to be optimistic.
So, you might wonder, well, what will be the origin of the next boom? My best guess is there will be another dot com crash, like the one in year 2000. Twitter became a listed public in NYSEC last year. Brilliant. Yet, since the news was announced, I was extremely skeptical about its performance. To begin with, why a company which was suffering a $500M loss, could have a higher offering price than Google and Facebook, where both of them just performed significantly better? Secondly, the prices of twitter just soared. More importantly, its P/E is at an astonishing 73, which was unreasonable when we considered its performance and its potential. What was the niche for twitter? How were they going to expand? To me, twitter had limited development. Hence, I considered it as highly over-rated. If Twitter could be so overrated, why not other aspiring tech companies who were thinking of going public? Essentially, according to George Soro's theory of reflexivity, when people realized the reality did not support their expectations, they were just going to sell the shares, contributing to a bust/ burst of a bubble. If we look into the Asia market, there might also be a Dot Com Burst 2.0. The performance of Tencent is a convincing piece of evidence. Time will tell whether my hypothesis is right or not.
Essentially, '2-1-5' , '2-1-2-3' and '3-2-3 are referring to the same thing. They only vary in the sense how you perceive it.
What are we going to do in these different phases?
When a bust occurs, the prices of everything will be driven down as a result. It means that the P/E ratio of companies will also be significantly lowered and more importantly, this means the market needs liquidity. So, if you can provide the liquidity, which is scarce in a bust as people generally are too busy to sell their assets. Hence, we should buy as much as we can in this phase. This enables us to exploit the concept of 'buy low, sell high' as when the economy recovers, so will the financial markets and hence the performance of individual companies.
In recovery, we should monitor closely the performance of our portfolio. We should remain confident that our investments are going to pay off.
When the economy is approaching/at its peak, we have to be extra cautious and rational. We must always remind ourselves of the downside to this prosperity. In fact, we should roughly estimate when the next bust is coming. Exercise discipline and gradually retrieve investments in 1-2 years before the bust comes.
Hope everyone get something out of this long piece. Embrace the bullish market everyone!
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