| 17 November 2010
Acknowledging that markets move in cycles is rather mundane, the patterns are obvious. Unfortunately most discussions of cycles are based on ideas which are woefully silly, simplistic, and assume knowledge of future events that we cannot know.
Part of our work on Long Term Investing is showing why markets move in cycles. The bedrock of that analysis is arriving at an understanding of the real earnings capacity of a given asset class, and how that is returned to investors. Once that is accomplished it is pretty apparent that markets move well above the price that can deliver adequate returns, and then moves down to levels where the returns are much higher than they need to be to entice investors.
This process is primary psychological as base emotions, fear, greed and envy , combined with the tendency to extrapolate recent events indefinitely, drives stocks too high, and then too low.
We believe we are in the second decade of stocks working down from the most over valued period in US stock market history to undervalued on a sustained basis. We are still substantially overvalued on a sustainable basis, and we cannot know in advance how cheap the market will eventually get, or the timing.
We suggested watching the legendary Jeremy Grantham’s excellent interview which gave you one well reasoned look at how that may occur. Today we suggest another great investor’s thoughts on the matter, Felix Zulauf.
He gives a wonderful interview with Barry Ritholtz in a podcast that can be found by clicking here: http://www.ritholtz.com/blog/2010/08/the-big-picture-interview-felix-zulauf-2/
If you would like a transcript instead, or in addition, you can read the interview by clicking here: http://www.ritholtz.com/blog/2010/08/felix-zulauf-up-close-and-personal-transcript/
Barry has also given us this graphic describing in general terms how Felix sees markets evolving over time. Click the image for a larger version.