Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks (Summary)

“In this concise summary of Mastering the Market Cycle, you will discover my essential takeaways organized chronologically, designed to save time and serve as a convenient reference for future use. When relevant, I include a personal note to express my opinion or key take-away from the text, adding a personalized touch to the summary. To dive deeper into the complete book, I have provided an affiliate link to Amazon, where you can effortlessly purchase it for global delivery.” – Jeroen Snoeks.

How “Mastering the Market Cycle” Broadened My Perspective

During my formative years in primary school, I was first introduced to the concept of economic cycles. Even at that young age, it struck me how, as a species, we often fall into the trap of repeating the same mistakes. This notion was further reinforced during my history lessons in the following years.

The experience of reading “Mastering the Market Cycle” resonated deeply with these early musings. As an investor who has witnessed several boom-bust cycles, the book’s content felt profoundly relevant. I was so impacted that I purchased a pendulum swing for my desk, serving as a constant reminder of the cyclical nature of markets. The book presents a comprehensive understanding of market cycles and their significant role in investing. It offers insightful guidance on how to leverage the understanding of cycles to determine your current position in the market and anticipate future trends.

In the following sections, I’ve detailed my key takeaways from each chapter in the same order they appear in the book. This structure should make it easier for you to cross-reference any particular chapter if you decide to delve deeper into the subject matter.


A wining investment philosophy can be created by 5 elements:

  1. An education in accounting, finance and economics provides a foundation;
  2. A view on how markets work + refine as you proceed;
  3. Continue to read (broadly) => embrace those ideas which you find appealing and discard those you don’t;
  4. Those who invest in solitude missing out a lot, both intellectually and interpersonally;
  5. Experience.

I. Why Study Cycles?

If we apply some insight regarding cycles, we can increase our bets and place them on more aggressive investments when the odds are in our favor, and we can take money off the table and increase our defensiveness when the odds are against us.

II. The Nature of Cycles

  • Upswings are followed by downswings and then eventually by new upswings as each causes the next.
  • “History doesn’t repeat itself, but it does rhyme” – Mark Twain.
  • The explanation of a current situation has to be based on the events that went before => cycles neither begin or end; they oscillate around the midpoint.
  • (Buy yourself a pendulum swing for on your desk as a reminder of how all works in cycles.)
  • The various cycles operate on their own, but they also continuously affect each other.
  • “this time is different” => almost never; “boom/bust” => almost every time.
  • “The air goes out of the balloon much faster than it went in” – Sheldon Stone. It can take years before you reach the top of a cycle => the bottom is often reached in rapid succession.
  • Warning signals in every boom/bust are the general ones: excessive optimism, risk aversion and generous capital markets.
  • Definition of insanity: “doing the same thing over and over and expecting different results” – Albert Einstein

III. The Regularity of Cycles

Although everything moves in cycles one can’t recognize a fixed pattern how far an upcycle/downcycle goes, nor how long these last.

IV. The Economic Cycle

  • Long term cycles are influenced by the GDP (Gross Domestic product) => the more working hours, the more is earned, consumed, etc. Thus, the birthrate is very important for the long term growth cycle. Although, more working hours can also be achieved by a change in efficiency, demographics, increase of own working hours, greater participation of people, better education, technology, robots, etc.
  • Short term cycles are influenced by psychology, emotion and decision-making processes.

V. Government Involvement with the Economic Cycle

  • Central bank’s focus: (tempering) inflation + (stimulating) employment => these dual responsibilities are in opposition of each other.
  • Government’s focus: cut taxes / increase government spending => stimulate economic activity vs. increase taxes / cut government spending => slowing economic activity.
  • If managing a cycle is easy, we wouldn’t see the extremes we do.

VI. The Cycle in Profits

  • Prices of (industrial) raw materials and luxury goods are directly responsive to economic cycles, food and everyday necessities are not (or less).
  • Technological development can change industries fast, thus impacting their cycle.

VII. The Pendulum of Investor Psychology

  • A swinging pendulum may be at midpoint “at average”, but it actually spends very little time there.
  • Picture the market as a pendulum swinging from greed to fear.
  • The super investor is mature, rational, analytical, objective and unemotional!

How investors react to events when they are feeling good about life:

  • Strong data: economy strengthening – stocks rally
  • Weak data: FED likely to ease – stocks rally
  • Data as expected: low volatility – stocks rally
  • Banks make $4 billion: business conditions favorable – stocks rally
  • Banks lose $4 billion: bad news out of the way – stocks rally
  • Oil spikes: growing global economy contributing to demand – stocks rally
  • Oil drops: more purchasing power for the consumer – stocks rally
  • Dollar plunges: great for exporters – stocks rally
  • Dollar strengthens: great for companies that buy from abroad – stocks rally
  • Inflation spikes: will cause assets to appreciate – stocks rally
  • Inflation drops: improve quality of earnings – stocks rally

Of course, the same behavior also applies in the opposite direction.

VIII. The Cycle in Attitudes Toward Risk

  • Excessive risk tolerance contributes to the creation of danger and the swing to excessive risk aversion depresses markets, creating some of the greatest buying opportunities.
  • Most people are most willing to buy when they should be most cautious, and most reluctant to buy when they should be most aggressive. Superior investors recognize this and strive to behave as contrarians.

IX. The Credit Cycle

  • The credit cycle is very important as it shows the changes in the availability of capital or credit; it contributes one of the most fundamental influences on economics, companies and markets.
  • Looking for the cause of a market extreme usually requires rewinding the videotape of the credit cycle a few months or years. Most raging bull markets are abetted by an upsurge in the willingness to provide capital, usually imprudently. Likewise, most collapses are preceded by a wholesale refusal to finance certain companies, industries, or the entire gamut of would-be borrowers.

An uptight, cautious credit market usually stems from, leads to or connotes things like these:

  • Fear of losing money
  • Heightened risk aversion and skepticism
  • Unwillingness to lend and invest regardless of merit
  • Shortages of capital everywhere
  • Economic contradiction and difficulty refinancing debt
  • Defaults, bankruptcies and restructurings
  • Low asset prices, high potential returns, low risk and excessive risk premiums

Taken together, these things are indicative of a great time to invest.

On the other hand, a generous capital market is usually associated with the following:

  • Fear of missing out on profitable opportunities
  • Reduced risk aversion and skepticism (and, accordingly, reduced due diligence)
  • Too much money chasing too few deals
  • Willingness to buy securities in increased quantity
  • Willingness to buy securities of reduced quality
  • High asset prices, low prospective returns, high risk and skimpy risk premiums

It’s clear from this list of elements that excessive generosity in the capital markets stems from a shortage of prudence and thus should give investors one of the clearest red flags.

  • Superior investing doesn’t come from buying high-quality assets, but from buying when a deal is good, the price is low (relative to intrinsic value), the potential return is substantial, and the risk is limited. These conditions are much more the case when the credit markets are in the less-euphoric, more-stringent part of their cycle. The slammed-shut phase of the credit cycle probably does more to make bargains available than any other single factor.

X. The Distressed Debt Cycle

  • A distressed debt investor tries to figure out (a) what the bankrupt company is worth (or will be worth at the time it emerges from bankruptcy), (b) how that value will be divided among the company’s creditors and other claimants, and (c) how long this process will take. With correct answers to those questions, he can determine what the annual return will be on a piece of the company’s debt if purchased at a given price.
  • The opportunities to profit in distressed debt are highly cyclical and determined by developments in other cycles.
  • When it’s difficult to get your hands on new debt, high yield bonds are probably a quite safe investment and vice versa!

XI. The Real Estate Cycle

  • Over the course of my career I’ve heard investment in real estate by easily digested statements like “they’re not making anymore” (in connection with land), “you can always live in it” (in connection with houses), and “it’s a hedge against inflation” (in connection with properties of all types). What people eventually learn is that regardless of the merit behind these statements, they won’t protect an investment that was made at too high a price.
  • The real estate cycle is quite unique as there are long lead times required for real estate development to take place. These long lead times will stretch the cycles trend (especially the uptrend).
  • Projects started in good times often open in bad times, meaning their space adds to vacancies, putting downward pressure on rents and sales prices.
  • In the cycle’s low, after the best investments are halted, invest in partly finished projects (often bought from lenders that had repossessed them) and complete them as you will benefit.
  • Rationalization for price appreciation that has taken place (and prediction of still more to come) invariable occurs at highs, not lows.

XII. Putting It All Together- The Market Cycle

Financial facts and figures are only a starting point for market behavior; investor rationality is the exception, not the rule. The market spends little of its time calmly weighing financial data and setting prices free of emotionality.

The three stages of a bull market:

  1. When only a few unusually perceptive people believe things will get better;
  2. When most investors realize that improvement is actually take place;
  3. When everyone concludes things will get better forever.

“What the wise man does in the beginning, the fool does in the end.”

“First the innovator, then the imitator, then the idiot.” – Warren Buffet

The three stages of a bear market:

  1. When just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy;
  2. When most investors recognize that things are deteriorating;
  3. When everyone’s convinced things can only get worse.

Whenever people are willing to invest regardless of price, they’re obviously doing so based on emotion and popularity, rather than cold-blooded analysis. It always ends bad as the inflated prices will crash eventually.

“No asset or company is so good that it can’t become overpriced.’

The “price doesn’t matter” mentality is necessary to recognize a bubble.

XIII. How to Cope with Market Cycles

How to position capital? => You need to know where you are in the cycle! Look at valuation metrics (like P/E, P/B, etc.) and investor behavior!

“To buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest rewards.” – Sir John Templeton

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” – Warren Buffet

A guide to market assessment:

MarketBullish (Up-Cycle)Bearish (Down-Cycle)
Capital markets:LooseTight
Interest rates:LowHigh
Yield SpreadsNarrowWide
 Eager to buyUninterested in buying
Markets:CrowdedStarved for attention
Funds:Hard to gain entryOpen to anyone
 New ones dailyOnly the best can raise money
 General Partners hold the cards on termsLimited Partners have bargaining power
Recent performance:StrongWeak
Asset prices:HighLow
Prospective returns:LowHigh
Popular qualities:AggressivenessCaution and discipline
 Broad reachSelectivity
The right qualities:Caution and disciplineAggressiveness
 SelectivityBroad reach
Available mistakes:Buying too muchBuying too little
 Paying upWalking away
 Taking too much riskTaking too little risk

“For each pair, check off the one you think is most descriptive of the current market. And if you find that most of your checkmarks are in the left-hand column, hold on to your wallet.” => Especially when most of the checkmarks where in the right-hand column recently.

From a given point in the cycle, the market is capable of moving in any direction: up, flat or down.

But that doesn’t mean all three are equally likely. Where we stand influences the tendencies or probabilities, even if it does not determine future developments with certainty. All other things being equal, when the market is high in its cycle, a downward correction is more likely than continued gains, and vice versa. It doesn’t have to work out that way, of course, but that’s the safer bet. Assessing our cycle position doesn’t tell us what will happen next, just what’s more and less likely. But that’s a lot.

In an upcycle, when (high) valuation metrics and (stupid) investor behavior is the common theme look out to trim or sell your current positions.

When should we begin to buy?

  • First, there is absolutely no way to know when the bottom has been reached, since the bottom is defined as the day before the recovery begins.
  • Second, it’s usually during market slides that you can buy the largest quantities of the things you want, from sellers who are throwing in the towel and while the non-knife-catchers are hugging the sidelines.
  • Thus, always have a watchlist of stocks per sector / industry. Only when the valuation metrics are so low that you feel it’s a steel to buy, buy! If (and mostly when) the prices decrease further, buy more!
  • In addition to your watchlist always make use of market scanners when blood floods into the streets so that you can find new buying candidates (or sectors/ industries in a low cycle).
  • “The market can remain irrational longer than you can remain solvent.” – John Maynard Keynes

Personal note:

A downturn can potentially extend over several years, as exemplified by the Great Depression; thus, it’s crucial not to always anticipate a swift rebound, as I personally observed during the financial crisis of 2007/2008.

It’s vital to maintain sufficient liquidity during a downcycle, which can be achieved by strategically offloading portions of your portfolio at high valuations during an upcycle.

XIV. Cycle Positioning

There are three ingredients for success – aggressiveness, timing and skill – and if you have enough aggressiveness at the right time, you don’t need that much skill.

The formula for investment success should be considered in terms of six main components, or rather three pairings:

  • Cycle positioning – the process of deciding on the risk posture of your portfolio in response to your judgements regarding the principal cycles.
  • Asset selection – the process of deciding which markets, market niches and specific securities or assets are overweight and underweight.
  • Aggressiveness – the assumption of increased risk: risking more of your capital; holding lower-quality assets; making investments that are more reliant on favorable macro outcomes; and/or employing financial leverage or high-beta (market-sensitive) assets and strategies.
  • Defensiveness – the reduction of risk: investing less capital and holding cash instead; emphasizing safer assets; buying things that can do relatively well even in the absence of prosperity; and/or shunning leverage and beta.
  • Skill – the ability to make these decisions correctly on balance (although certainly not in every case) through a repeatable intellectual process and on the basis of reasonable assumptions regarding the future. Nowadays this has come to be known by its academic name: “alpha”.
  • Luck – what happens on the many occasions when skill and reasonable assumptions prove to be of no avail – that is, when randomness has more effect on events than do rational processes, whether resulting in “lucky breaks” or “tough luck”.

Let’s say you are in a propitious environment:

  • The economic and profit cycle are on the rise and/or likely to meet or exceed people’s expectations;
  • Investor psychology and attitudes towards risk are depressed (or at least sober) rather than feverish, and thus
  • Asset prices are moderate to low relative to intrinsic value.

In such a case, aggressiveness is called for. So you increase your commitments and add to your portfolio’s risk posture and “beta” (market sensitivity).

XV. Limits on Coping

The trick is to survive! Being wrong comes with the franchise of an activity whose outcome depends on an unknown future.

XVI. The Cycle in Success

“Don’t confuse brains with a bull market.”

The important lesson is that – especially in an interconnected, informed world – everything that produces unusual profitability will attract incremental capital until it becomes overcrowded and fully institutionalized, at which point its prospective risk-adjusted return will move toward the mean (or worse).

And, correspondingly, things that perform poorly for a while eventually will become so cheap – due to their relative depreciation and the lack of investor interest – that they’ll be primed to outperform. Cycles like these hold the key to success in investing, not trees that everyone is assuming will grow to the sky.

Investors should be leery of popular assets. Rather, it’s unpopularity that is the buyer’s friend.

XVII. The Future of Cycles

“It’s different this time” are four of the most dangerous words in the business world => when you hear these words you must be at or near the peak of a cycle.

The point is that people always bring emotions and foibles to their economic and investing decisions. As a result, they’ll become euphoric at the wrong time and despondent at the wrong time – exaggerating the upside potential when things go well and the downside risk when things go poorly – and thus they’ll take trends to cyclical extremes.

XVIII. The Essence of Cycles

Be aware of where you are in the cycle at any given point.

Personal note:

Traditionally, I have adhered to a practice of exiting my winning positions when the price experiences a 20% decrease from its peak. However, recent insights into market cycles have prompted me to reconsider this approach, particularly when my position is still within a downward cycle. If my valuation metrics are still indicating a favorable buying opportunity – and if there are no superior investment options currently available despite the price decline, it would be wise for me to consider holding onto or even adding to my position.


(Market) collapses occur rapidly but recovery comes slowly.

Reading the original book instead of a summary offers a comprehensive understanding, emotional connection, appreciation of the author’s writing style, direct support for the author, and the chance to discover hidden gems. Enhance your reading experience by purchasing the book through my affiliate link: Get the Book on Amazon.

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