Legendary Investor Howard Marks’ New Book: 5 Things That Investors Should Know About The Profit 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 will share some interesting ideas about cycles that I gathered from his latest book. In my previous article, I discussed the economic cycle. In this article, I want to share about the profit cycle.

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

1. The ups and downs of the economy are important in determining the rise and fall of corporate profits. More GDP (gross domestic product) means more consumption, which leads to stronger demand for goods. This, in turn, means greater volume and price of goods sold by companies.

2. By definition, the collective sales of all businesses are one and the same as GDP, and they (as a whole) reflect the same rate of change. But this does not mean all companies follow the same pattern. For example, sales of industrial raw materials and components respond directly to economic changes while everyday necessities such as food, beverages, and medical drugs are not highly responsive since people will need such products during both good times and bad.

3. Sales of some major durable goods such as cars, homes, factories, and major equipment respond to factors such as the credit cycle (more on the credit cycle in a future article), technological developments and more.

4. The profit cycle is also affected by the uneven rate of change between sales and profit. This is mainly due to leverage of two types – operating leverage and financial leverage. The former arises from fixed costs in a business while the latter comes from the debt used by a business.

5. Last but not least, investors should watch for technological disruption on a company’s profit. For example, the rise of the internet has disrupted traditionally strong businesses such as newspapers and brick-and-mortar retailers.

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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.