How Cycles will influence your investments and investments performance?

04 September 2018

How Cycles will influence your investments and investments performance?

Greetings from Hitesh! From Birth to Death, From Winter to Monsoon, From Day to Night, From Janaury to December, From Sunday to Saturday, everything is in CYCLE. So, the Economy also moves in cycle. There is Virtuous Cycle (Teji – expansionary cycle) and there is Vicious Cycle (Mandi – Contractionary cycle).

Being in the market – you can’t avoid cycle.

How Cycle Changes your Calculations?

All your Value calculations may VANISH when CYCLE change, Estimates will go wrong, circumstances can change, and all SURE THINGS may change with the change in cycle. However, there are two things which will not change in any given cycle and they are….

1.  Most things will prove to be cyclical.

2.  Some of the greatest opportunities for gain and loss come when other people forget point number 1.

It means that those who are alert to cycle change – can make the moolah.

There are mainly two major cycle of CREDIT EXPANSION AND CREDIT CONTRACTION. They affect the market very deeply.

Expansionary cycle: -

It takes small fluctuation in the economy to produce a large fluctuation in the availability of Credit, with great impart on asset prices and back on the economy itself.

The process goes something like this…..

1.  The economy moves into period of prosperity.

2.  There is an increase in capital providers and increase in capital base.

3.  Bad news is scarce so the risk in lending seems to be low or nil.

4.  Risk awareness disappears.

5.  All financial institutions go on lending spree.

6.  They compete for market share with each other.

7.  They end up lending to businesses who are not going to be viable in the future.

2008 Peak and fall in the world market was due to the above cycle. Current cycle started in 2009 and it is also adding lot of liquidity into the market and all world market are at peak now.

Contraction Cycle: -

1.  Losses in the above cycle causes lenders to be cautious and they get discouraged towards lending.

2.  Risk awareness rises and along with it interest rates, credit restrictions and covenant requirements (look at the way Indian banks are heading – we are entering in contraction cycle).

3.  Less capital is made available and to the most deserving borrowers.

4.  Companies become starved for capital, borrowers are unable to roll over their debt, leading to default and bankruptcies.

5.  The process contributes to and reinforces the economic contraction.

When to identify that cycle is changing?

When you hear “This time its Different”, this is the time when cycle is about to change. I have observed 5 teji and 5 mandi’s in the market since 1992 and every time the same dialogue comes and cycle changes.

For our readers, we had already told them that MANDI is coming in 2018 way back in May 2017 and October 2017. Today there are 1700 shares which are below their 200 days moving averages. That’s why we said in the last week post about the paradise for VALUE INVESTORS.

What are the other kinds of cycles?

Technology changes (Kodak/Nokia), Political changes(TRUMP in USA), Change in Population composition (Modi’s win in 2014 was ascribed to all first-time voters), Religious cycle and there are many such major or minor cycles running at any given point of time and they will keep on influencing the market.

But the credit cycles are the major reason for market up or down movements along with politicians whims and fancies (E.g. Trump).

Cycles in India: -

If you look at the market cycles in India since 1992, we have different sectors or companies moving up in every teji. In 1992 – there were old economy stocks moving with REPLACEMENT COST theory. In 1997 – all FMCG stocks moved up. In 1999-2000 – ICE stocks or K-10 stocks moved up. In 2004-2007 – all housing and infrastructure companies moved up. In 2011-2013 – pharma stocks moved up, 2017- all midcap and small cap moved up, 2018 – big 10 companies are moving up.

Many guys kept on holding their stocks when the cycle changed assuming their companies are good, and they will move up some day. They are still holding them, or they have sold most at loss of 80-90% in later years. Very few companies have given good returns in next cycles or next decades. Unless you are attentive to these changes, you will go for a toss in the market. That’s why Buffett pays very high importance to VALUE INVESTING. If you have bought share at lesser prices then Value, then you have very little to worry for the TEJI MANDI cycle.

What NEXT?

Pay attentions to each cycle change in the market. It will give indication for your action in managing your portfolio.

If you have limited capital and not having much patience – you should always play in the sectors which are flavours of the seasons.

If you need guidance in investing – you can approach us.

Have a Great Day.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.