Investment: listening to the market cycle

For a while, I learned to push hands from my colleague Master Zhang. During the learning, I had an “epiphany” moment and felt that investment should be like pushing hands. On the one hand, we must stand firm and manage risks well. On the other hand, we must seize the opportunity to win good returns.

Empty hands cannot withstand knives and guns, so pushing hands is just a recreational fitness exercise. But the ancient wisdom contained in the sport of pushing hands is useful in all confrontations with opponents. For example, the two armies face each other, even if they use artillery to conduct a positional offensive and defensive battle, they are essentially pushing hands. In today’s trade war, how to confront each other, in essence, is also pushing hands.

The inspiration of the game of pushing hands on investment has allowed me to form my own investment philosophy.

I have talked a lot before, and I especially emphasized “listening”, that is, to cultivate one’s own sensitivity to the opponent and the environment, and to improve the ability to perceive the other’s intentions. In terms of investment, we must cultivate our ability to understand the market and better “listen” to the market.

However, there are many characteristics of the market, so what should you listen to the market? The most important thing is to listen to the market cycle. This is like the opponent in the pusher. Due to the center of gravity, he has an offensive and a retreat, forming a certain cycle. If you have no understanding of his advances and retreats, no preparation, no countermeasures, then you will definitely not win or lose.

Why is the cycle especially emphasized? Because the cycle is the most obvious element in the market and it can be used and must be used. Other things, such as a certain superhuman predictive ability of investors, or inside information, are difficult to explain systematically. And advanced quantitative methods cannot be explained in a few words.

So, why use cycles?

Generally speaking, investment faces the uncertainty of the future. The purpose of understanding the market cycle is to reduce future uncertainty or give a better probabilistic description of future uncertainty. Some events, especially those that may have a significant impact on investment, even if we are not sure whether they will happen tomorrow, we can grasp the possibility of whether they will happen in a few weeks or months. Knowing these probabilities, we can make early preparations, adjust positions, avoid major losses, or wait for major gains.

Some strategies, such as high-frequency investment, seem to be able to ignore the cycle, but in fact, under certain market conditions, these strategies will also fail, and therefore will also be affected by the cycle. Another theory emphasizes long-term holding, that is, completely ignores periodicity. This kind of theorist gives some data, saying that from a certain year long ago to today, if you never put money in and out, the rate of return is very high. But who would wait so long? Moreover, if you look at the changes in the market, it is usually a good performance that is suddenly “destroyed”, and those moments, that is, a rapidly deteriorating market, usually have causes, which are caused by cycles. If you can listen to the cycle and use the cycle, you can avoid these moments, and the results of the investment will be “multiplied with half the effort.”

Therefore, in terms of investment, it is very important to “listen” to the market cycle.

Cycle is a loyal good friend and will not fail to come. Mark Twain once said: “History Doesn’t Repeat Itself, but It Often Rhymes”. This is because the cycle is caused by a certain mechanism. This mechanism has economic reasons, government reasons, some institutions such as the Federal Reserve, and investor psychology. Because these reasons are not mechanical, this cycle is not as accurate as a clock, but it is still like a spring in an old-fashioned clock. The tension is accumulating and needs to be released sooner or later. If we feel the tension carefully, we will predict the arrival of the cycle. Of course, institutions such as the government and the Federal Reserve are also listening to this cycle, and they will do all kinds of things to interfere, reduce or backfire to aggravate these tensions, so that the regularity of the cycle changes, but the cycle cannot be eliminated.

Some people will say, what will happen if everyone listens to the cycle? Is it to speed up or slow down the cycle? It’s all possible. But my experience is that according to the 80/20 rule, generally speaking, 80% of people will be unwilling or will not listen to the cycle, and in the other 20% who will listen to the cycle, 80% will not do the right thing. Therefore, only the remaining 4% will make a relatively perfect use of the cycle, surfing comfortably in the waves.