The Violence of Secular Market Cycles

What makes investing (and the investment business for that matter) so difficult and dislocating is that it has violent, long, boom/bust secular cycles.

Secular cycles occur once in a generation. The booms last at least a decade and often longer, and the busts often are shorter but destroy lives, fortunes, and business models.

The word cyclical comes from cycle which, according to Webster's dictionary, is "a round of years or a recurring period of time in which certain events or phenomena repeat themselves in the same order."

For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominate management, acted like businessmen; they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy.

Management was not evil; they were doing what they thought was right. Large amounts of public money were raised and very quickly lost. Short-termsales profits were collected at the expense of, not only the public, but the firm's long-term credibility and profitability.

The firm erred in the other direction in the spring of 2003 when it shut down its Asian Equity Fund, which it had invested exclusively in the Asia ex Japan markets. The fund had shrunk from $350 million 10 years earlier when the Asian Miracle was on everyone's lips, to less than $10 million. At that level of assets, it was a clear money-losing proposition, so it was the right, short-term business decision to close it down.

At the time, there didn't seem to be any interest in Asia. However, the smaller Asian markets were then incredibly cheap, the economies of the area were surging, and Asian equities were exactly the right place to be.

I argued vociferously to keep the fund open, and maintained that, as the markets rallied, new assets would come. To no avail. No one agreed with me, and the fact that they didn't was a buy signal.

If only public investors and the managements of profit-driven investment management companies could understand how important it is to not mindlessly follow the crowd. An Australian oil man, John Masters, expressed it succinctly in one of his annual reports.

You have to recognize that every "out-front" maneuver is going to be lonely. But if you feel entirely comfortable, then you're not far enough ahead to do any good. That warm sense of everything going well is usually the body temperature at the center of the herd. Only if you're far enough ahead to be at risk do you have a chance for large rewards.