Surviving the Cycle Is Winning

Surviving the Cycle Is Winning. Five Keys to Understanding Cycles Here are several points about cycles themselves: First, everything important has a cycle. There is a time to be born and a time to die; a time to sow and a time to reap; a time for war and a time for peace; a time to love and a time to hate. Second, cycles are the strongest force. When asking whether something can endure forever, we often debate whether people or institutions matter more. Both matter, and neither can be relied upon. Cycles matter more than either. When the time is right, heaven and earth work together; when fortune turns, even heroes lose their freedom to act. Nothing can resist the cycle. Third, each new cycle resembles the previous one but is never exactly the same. History always rhymes—and only rhymes. Fourth, live long enough and you will experience everything in the cycle. The technical term is ergodicity: over a sufficiently long period, everything that can happen will happen. Sooner or later, accounts must be settled. You watch someone build a grand house, entertain guests, and then watch the house collapse. Fifth, cycles exist at different levels: the ups and downs of lives, the rise and decline of organizations, the emergence and fall of dynasties. Take a cross-section through time and cycles are operating at every level. Those levels are nested, and an individual’s fate may be shaped by another cycle several floors above. On one hand, the greatest determinant of a person’s fate is not individual effort but when and where they were born, and into what family. On the other, effort is not powerless. Intervene in the small cycle of your own life as much as possible, hoping to align it with larger, stronger cycles—or at least reduce the mismatch. “Personal destiny depends on one’s own efforts, but one must also consider the course of history.” ---- Three Different Types of Cycles The first involves assets such as tulips, clivia plants, and pu’er tea. They generate no interest or income and have little practical use. Their prices rise only because people expect them to keep rising. Rising prices and expectations of further increases reinforce one another. This positive feedback lasts only so long. Most participants understand that they are there to ride an expanding bubble, hoping to escape before it bursts. Such cycles are common, but they are a party for only a small group. In the second type, companies’ rising share prices and growing profits form a closed loop. This is what Soros calls reflexivity: every share-price increase is supported by improving earnings, and every increase in turn helps earnings improve further. For example, some consumer-goods companies have extensive distribution networks. Distributors buy and stock products while also buying the company’s shares. Their product purchases create sales revenue and accounting profits for the listed company. A price-to-earnings multiple in the tens then magnifies those profits into a rising share price. Distributors make large gains on shares bought earlier and use the proceeds to buy more products, repeating the cycle. As long as market capitalization keeps expanding, both company and distributors are happy. With a well-chosen company and a persuasive story, the game can last a long time and even become a firmly held belief for many. Moutai looks very much like such a story. The third type involves the economy: Step one: the economy emerges from a trough. Businesses’ and households’ expectations improve; businesses invest more, households consume more, and banks lend more. Step two: leverage rises and credit expands, pushing the economy higher. Step three: credit expansion and economic growth become mutually causal, creating a self-reinforcing loop. If people become intoxicated by the good times, imagine they have entered a new economy, and forget that credit has simply expanded too far, a fourth step eventually arrives. The Minsky moment—the moment to settle the bill—will come. Prosperity ends and deleveraging begins. After the shakeout, another cycle starts. Nobody escapes the economic cycle. --- Different Approaches for the Long and Short Term With cycles surrounding you everywhere, what should you do? The answer depends on the long and short term. The long term means that, whatever cycle we are discussing, you will face many rounds in your lifetime. Financial cycles, for example, seem to have become more frequent, with one roughly every ten years. Over a forty-year career, you can experience several more. You need not rush as though there were only one chance in your life to make a fortune. Nor should you become smug if you seize one opportunity, imagining that winning once means winning for life. Across a whole career, the most important thing is to survive many cycles. Survival is winning. Focus not on temporary gains and losses but on a dependable long-term plan. Dependable does not mean complicated. You should recognize its soundness at a glance. Know that winter is inevitably coming. Do not go all-in on leverage in good times; hold on and do not give up in bad times. These principles are obviously sound and everyone understands them, yet few follow them. You need a dependable plan for yourself. The short term concerns identifying and capturing turning points within a particular cycle. The first recommendation, for the vast majority of people: do not try to catch turning points. Turning points are unknowable, or at least cannot be reliably known in advance. This holds for most people. But you are not powerless: some yardsticks can indicate whether current levels are relatively high or low. For example, Nobel laureate Robert Shiller’s measure of US stock-market valuation compares the current price-to-earnings ratio with the average US market price-to-earnings ratio over the past ten years. Using this simple rule, Shiller tells people how overvalued US stocks are. He has been issuing warnings for years in this cycle. As before, people initially take him very seriously; then stocks keep rising for several years and people start mocking him. Often, when people begin mocking Shiller, he turns out to be right. Now may be such a moment. You need not use Shiller’s yardstick. Any simple, dependable, common-sense measure will do. Apply it to the cycle you care about: be more aggressive while levels remain relatively low and more conservative when they are high. You will not go too far wrong. For most people, getting this far already puts you ahead of most others. But perhaps you are not satisfied and want to go further. The second recommendation is a theory for identifying turning points. It is called the LPPL model—Log-Periodic Power Law. Its creator, ETH Zurich professor Didier Sornette, believes it can precisely predict where and when bubbles will burst. Sornette began as a geophysicist specializing in earthquake prediction before turning to finance. Conventional wisdom says earthquakes cannot be predicted precisely, just as financial bubbles cannot; the underlying logic is similar. Sornette rejected that view. He found a crucial similarity between stock-market bubbles bursting and fractures in the Earth’s crust: pressure inside the crust grows faster than exponentially before an earthquake, just as share prices rise faster than exponentially before a bubble bursts. Super-exponential growth means growth faster than exponential growth. On a share-price chart, it appears as an accelerating run-up toward a peak, with ever-increasing acceleration—the final frenzy. Professor Sornette gave it a precise mathematical expression and identifies turning points by detecting traces of super-exponential share-price increases. Catching turning points is the investment industry’s ultimate secret. Be skeptical of anyone claiming to have found it. In a financial world with transparent information and complete rationality, turning points cannot be captured reliably. Financial markets are dynamic systems: if you capture one this time, and everyone copies your method next time, the turning point arrives earlier and falsifies the prediction. This is a paradox: the more people subscribe to the theory, the less valid it becomes. In the real world, however, people take a long time to learn and adjust their behavior. If Sornette’s theory holds, there may be a long interval before it becomes widely accepted and thereby ceases to hold. #得到 #王爍30天認知訓練營 (Dedao; Wang Shuo’s 30-Day Cognitive Training Camp)