Welcome to the seventh post in our continuing look at common investor errors. Today, we are going to look at something that is a regular subject of the blog: neglecting to pay attention to long secular cycles

Not Understanding the Long Cycle:  Societies, economies and markets all move in long secular eras. Sometimes these periods are positive (i.e., 1946-66; 1982-2000) and are called secular bull markets. Sometimes they are negative (1966-82; 2000-?) and are called secular bear markets.

Let’s use 1982-2000 era as an example. The rise of technology – everything from software to semiconductors, mobile to networking, storage to biotech et. al. drove the broader economy. This led to record low unemployment, strong wage gains and high corporate profits. As you would imagine, stocks did exceedingly well in this environment. Asset allocations that were Equity-heavy did much better than those that carried lots of bonds and cash in that period. Conversely, the cycle that began in 2000 has rewarded bond and cash heavy portfolios and punished more equity-heavy ones.

Think about the many long-lasting positive elements that drove the post WW2 period (1946-66). You can list all of the negative societal factors that were a drag on the next secular bear period (1966-82).

Not understanding this cyclical backdrop is a common error. You should be more equity oriented during secular bull cycles and more tactical (i.e. bond and cash)  during secular bear cycles.

It is an investor’s job to preserve capital and manage risk during secular bear markets. During secular bull markets, maximizing returns are the top priority.

All investors need to understand what the secular backdrop is and adjust their allocations accordingly.

 

 

Previously:
Top 10 Investor Errors
1. Excess Fees
2. Reaching for Yield
3. You Are Your Own Worst Enemy
4. Asset Allocation vs Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs

 

Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Asset Allocation Matters More than Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

Category: Apprenticed Investor, Cycles, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Top 10 Investor Errors: Neglecting the Long Cycle”

  1. machinehead says:

    Here are total returns on the S&P 500 for the last five long half-cycle periods:

    Period Stock return (CAGR) Description

    1929-1949 1.47% manic peak to depressive nadir
    1949-1966 16.96% depressive nadir to manic peak
    1966-1982 5.24% manic peak to depressive nadir
    1982-2000 19.51% depressive nadir to manic peak
    2000-2012 1.10% manic peak to depressive nadir (pending)

  2. FrankInTheFalls says:

    I am finding this series of posts extremely helpful and informative.
    Now, how about some tips for identifying the long cycle?
    Many thanks!

  3. CANDollar says:

    @machinehead
    Those numbers put things in perspective. This is a very useful series of articles.
    Question: since the cycles are so long how does an advisor keep his or her clients weighted toward the more favourable assets?

    During a cyclical bull in equity I might start to get nervous about having a lower allocation in cash and bonds well before it is over (Where is this going? Whens it going to stop?)
    During a bear I would be happy about my capital preservation but might be worried I was seeing little growth in my portfolio.

  4. rd says:

    Demographics are one of the under-rated primary drivers of the long secular cycles. Bodes well for the US over the next half-century but it could be a tough decade before the demographics start to drive the growth again. Some countries (Japan, China, parts of Europe) are likely to have severe issues for decades to come as they age without young replacements and a relative inability to efficiently assimilate immigration.

  5. techy says:

    Does all this explain the 08/09 decline? and around 80% gain from the bottom till April 2010?

    Wasnt the 08/09 decline result of massive debt/leverage build up and the gain afterwards the result of reflation by the govts with monetory policies and fiscal stimulus??

    And once again we can be headed 40-60% down if nothing is done in Europe. But we all know by now that no govt in the world wants deflation hence the bottom is holding up no matter how dysfunctional the govts are??

    If reflation is implemented successfully by Europe, china, USA etc we can be headed for another 100% in next 2-3 years.

  6. [...] Don’t forget about the long cycle.  (Big Picture) [...]

  7. faulkner says:

    “Not Understanding the Long Cycle” begins with not having a long view, next not having a perspective on it, and finally not understanding what one is looking at.

    For most people, our self point-of-view has trouble looking into next week, much less next month, quarter, year or decade. (If we could, dieting would be easy.) Taking a perspective other than our own is an acquired skill most of us are not encouraged in. (If we were, we’d see more attempts to get along.) Understanding the idea of cycles that exist beyond our everyday experience is an exercise in abstract thinking.

    Understanding and responding to the Long Cycles instead of everyday experience is an acquired skill. It is both an indication of, and a reason for retaining an effective professional money manager.

  8. rd,

    re..”Demographics”..

    see some of..”…In spite of the predominance of family farms, there is strong evidence of a trend toward concentration in agricultural production. By 1997, a mere 46,000of the two million farms in this country accounted for 50% of sales of agricultural products (USDA, 1997 Census of Agriculture data). That number was down from almost 62,000 in 1992.

    In 1935, the number of farms in the United States peaked at 6.8 million as the population edged over 127 million citizens. As the number of farmers has declined, the demand for agricultural products has increased. This increased demand has been met (and exceeded) with the aid of large-scale mechanization (the use of large, productive pieces of farm equipment), improved crop varieties, commercial fertilizers, and pesticides. The need for human labor has also declined as evidenced by the increase in agricultural labor efficiency – from 27.5 acres/worker in 1890 to 740 acres/worker in 1990 (Illinois data; Hunt, 2001).

    As the U.S. farm population has dwindled, the average age of farmers continues to rise. In fact, about forty percent of the farmers in this country are 55 years old or older (Bureau of Labor Statistics). The graying of the farm population has led to concerns about the long-term health of family farms as an American institution…”
    http://www.epa.gov/agriculture/ag101/demographics.html

    and, maybe, with..

    http://search.yippy.com/search?query=Rise+of+the+Machines+Robots+replacing+evermore+Human+Workers&tb=sitesearch-all&v%3Aproject=clusty

    We should Question the “Conventional Wizdom” of ‘Demographics is Destiny’..

    for, in Light of.. http://search.yippy.com/search?query=Point+of+Beginning+magazine+GPS+GNSS+enabling+robotic+Farming&tb=sitesearch-all&v%3Aproject=clusty

    “We”‘re pretty close to Farming (as is, broadly, understood) “Hands Free”–not, just, for ‘Dialing’, anymore..

    seemingly, LSS: the ‘Answers’ lie, more, and more, Squarely, in the Public Policy-Sphere..

    how quickly ‘We’ can engage, in a Conversation worth having, as a (Country/Society(-ies)), will determine our Future Success, or lack thereof, no?

  9. suc·cess (sk-ss)
    n.
    1. The achievement of something desired, planned, or attempted: attributed their success in business to hard work.
    2.
    a. The gaining of fame or prosperity: an artist spoiled by success.
    b. The extent of such gain.
    3. One that is successful: The plan was a success.
    4. Obsolete A result or an outcome.
    [Latin successus, from past participle of succdere, to succeed; see succeed.]

    The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2009. Published by Houghton Mifflin Company. All rights reserved.
    success [səkˈsɛs]
    n
    1. the favourable outcome of something attempted
    2. the attainment of wealth, fame, etc.
    3. an action, performance, etc., that is characterized by success
    4. a person or thing that is successful
    5. Obsolete any outcome
    [from Latin successus an outcome, from succēdere to succeed]
    successless adj

    Collins English Dictionary – Complete and Unabridged © HarperCollins Publishers 1991, 1994, 1998, 2000, 2003
    http://www.thefreedictionary.com/success

    and, maybe, somewhere in the Exchange, We’ll never remember..”…that Latin is a Dead Language…”, as well..

  10. drewburn says:

    I did fairly well going “against the flow”. In ’99 I owned a bunch of little (tiny) S&Ls and utes. I was already out of tech. I subsequently (’01-’02) bought up natural resource stocks and sold pretty much everything else. I would be most interested in seeing chart comparisons that involve nat resource and gold stock versus the S&P and bonds. I’m still very (very) long nat res and gold miners, virtually nothing else other than some tiny, tiny banks bought during & since the collapse, and Santander, which I’m buying now.

  11. cmurphy9059 says:

    “Let’s use 1982-2000 era as an example. The rise of technology…led to record low unemployment, strong wage gains ”

    You are mistaken regarding wage gains. In fact inflation adjusted hourly wages for this period were basically stagnant, see http://www.data360.org/dsg.aspx?Data_Set_Group_Id=773.

  12. There are long cycles … which in turn are part of longer cycles.

    The daily economic news and data, the voraciously interpreted tea leaves of nearly every economist and blogger, are merely the dependent variables of the deterministic cycle.

    What is transpiring is the terminus of a US fundamental longer cycle. It will involve sudden and massive private and lesser sovereign country, state, and municipality debt repudiation. While the European debacle will be the focus of the tea leaf readers, repudiation of leveraged debt will be a global event.

    How much will the world’s quadrillion dollar worth of wealth contract? A lot.

    The debt-asset macroeconomic system, like the universe in which it exists, is a nonlinear system; observe October 1987.

    But first … a mid and end July and August 2012 US composite equity blow-off.

  13. [...] 4. Asset Allocation vs Stock Picking 5. Passive vs Active Management 6. Mutual Fund vs ETFs 7. Neglecting the Long Cycle 8. Cognitive [...]

  14. Iamthe50percent says:

    machinehead, the data look even worse when you account for inflation
    Oct 1929 CPI 17.3
    Feb 1949 CPI 23.8
    Giving another 27% loss to inflation

    Jan 1966 CPI 31.8
    Jul 1982 CPI 97.5
    Giving another 67% loss to inflation

    So much for stocks as a hedge against inflation

  15. [...] 4. Asset Allocation vs Stock Picking 5. Passive vs Active Management 6. Mutual Fund vs ETFs 7. Neglecting the Long Cycle 8. Cognitive Deficits 9. Past Performance vs Future Results 10. Not Getting What You Pay For [...]