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Legendary Investor Howard Marks’ New Book: 6 Things That Investors Should Know About The Economic Cycle

Howard Marks is the legendary investor who founded the investment firm Oaktree Capital (NYSE:OAK), which manages US$120 billion in assets currently.

Since 1990, Marks has been writing insightful memos to share his views about investing, markets, economics, and more. His memos are widely followed by investing enthusiasts globally. Warren Buffett once said that “When I see memos from Howard Marks in my mail, they’re the first thing I open and read.” In addition to his memos, Marks has also written two books The Most Important Thing: Uncommon Sense for the Thoughtful Investor, and Mastering the Market Cycle: Getting the Odds on Your Side. The latter was just published earlier this month.

In this article (and a few more in the future!), I want to share some interesting ideas about cycles that I gathered from his latest book. Given that he covered a number of different cycles in the book, I will focus on the economic cycle here.

The following are some key ideas about the economic cycle that investors might want to know:

1. The economic cycle provides the foundation for cyclical events in the business world and the markets. There are two parts to the cycle, the short term cycle and the long term cycle.

2. The output of an economy is the product of hours worked, multiplied by the output per hour. The former is determined by factors such as a country’s birthrate, while the latter focuses on productivity.

3. Given the formula for the output of an economy, the long term economic cycle will thus be the product of the two variables (hours worked, and output per hour). So, to understand the long term economic cycle, we will need to understand the factors that impact the two variables. For example, the change in an economy’s birthrate (as a result of wars, social mores, political policies such as China’s One Child policy, and others), demographic movements (people moving from villages to cities, for instance), and education levels will affect the total hours worked. Output per hour, on the other hand, depends on advances in technology which result in higher productivity – think the advent of the steam engine, electricity, railroads etc.

4. The attention of investors, economists, and regulators, however, is generally focused on short term economic growth. This results in the short term economic cycle, which is more volatile than the long term cycle.

5. The short term economic cycle is affected by human psychology, emotion, and decision making. For example, the fear of a coming recession might cause people to lower their consumption, even among those who have not lost their jobs. In another example, a government that over invests in infrastructure today may cause a temporary downturn in the economy in the future when it reduces its infrastructure investments.

6. The long term economic trend is relatively stable (as it depends on the birthrate and technology advances) while the short term trend is more volatile, thanks to the active participation of humans. Still, the short term economic cycle, in general, will follow, and fluctuates around, the long term economic cycle.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.