Posts Tagged ‘secular’

Closing in for the kill in value investing

Monday, January 3rd, 2011

In our previous two articles, Choosing the businesses with strong economics- Part 1: avoiding poor economics businesses and Choosing the businesses with strong economics- Part 2: finding durable competitive advantaged businesses, you have learnt about which businesses to avoid and which ones to look out for as your investment candidates. Once you have identified such businesses, the next question is, when do you make a move to invest in them?

First, you need to have some idea how much that business is worth. Our previous articles, Measuring the value of an investment and Effects of inflation on value of investment will give the mathematical explanations on how to value a business. But do not confuse mathematical precision with accuracy. As we said before in Confusion between precision & accuracy,

As the above-mentioned analogy shows, precisely wrong numbers are useless. If we use them, then the quality of our investing decision will degrade considerably.

For this reason, it is better to be vaguely right than to be precisely wrong.

Second, you must remember this: never ever pay for more than what the business is worth. In fact, it is advisable that the price you pay be of a certain margin (say 15%) below its worth. This is to give you a margin of safety against errors in judgement.

The next step is to wait patiently, stalking the business like a hunter. Eventually, bad news will strike the business, revealing the changes that will occur. Then the stock market will typically overreact, pulling the stock price to a level that is far below what it is worth. That will be the time to strike. The stock market overreacts because it is not rational and suffers the common mental pitfalls that ail every human. To be a successful investor, you need to be more rational than the market collectively. We recommend that you familiarise yourself with the common mental pitfalls as explained in our guide, Common mental pitfalls that leads you astray and Why are the majority so wrong at the same time and in the same ways?.

However, this step is the trickiest one and errors in judgement are most likely to be made. Bad news comes in two flavours:

  1. Changes to the business are temporary and therefore, a recovery will eventuate in due time.
  2. Changes to the business are permanent and therefore, there will be no recovery.

Thus, you have to discern the nature of the changes, understanding whether the context of the underlying trends in which the business changes occur is secular or cyclical (see Understanding secular vs cyclical). For example, as we explained before in Should value investors be ?bullish? in a bear market?,

One value-oriented stock research (which we will not name) believes that this current bear market will be like any other ?typical? bear market in the past- the downturn will last only 12 to 18 months. In other words, their position is that this coming recession will only be a V-shape or U-shape recession (see What type of recession is coming?). If they are wrong about that (i.e. the coming recession is an L-shape one), then their current ?Buy? recommendation will be very wrong.

In short, not all bear market purchase will turn out to be astute if the timing is way too early.

This is where value investors are most likely to get wrong.

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Posted in Investor Education, Value Investing | No Comments »

Does the major Chinese economic slowdown signify the end of the commodities boom?

Monday, November 17th, 2008

Even as late as the end of last year, when the credit crisis was only a few months old, there was a popular de-coupling theory that believes that Chinese economic growth will run independently from any malaise in the US economy. As we recalled what we wrote at Is Chinese growth ?de-coupled? from the US economy? in November last year,

According to this new theory, China should continue to grow and power the global economy regardless of what happens to the US economy. This is the ?de-coupling? theory. Proponents of this theory sees that so far, China had ?de-coupled? (both in real and financial terms) the most from the US.

Today, this theory is very much discredited. As this news article from the Sydney Morning Herld (SMH) says,

China’s domestic economy is slowing, but no-one really knows how much.

IT IS NOW eight weeks since Beijing waved goodbye to the Olympic Games and yet the sky remains an eerie, brilliant blue. The world is waiting for China’s smokestack economy to roar back to life.

Only weeks ago it seemed China might provide an island of growth that would keep Australia afloat while the rest of the world fell apart.

How could a Wall Street credit crisis knock over a country with closed capital accounts, where shops do not take credit cards and where people buy apartments with suitcases of cash?

There is no doubt that the Chinese economy is slowing much more than expected. The latest data reported that China’s 3rd quarter GDP slowed to a less than expected single digit of 9% (see China’s third quarter GDP growth slows to 9%). There are reports that tens of thousands of factories in China’s manufacturing province, Guandong, have already gone bust.

Is China falling into a recession along with the rest of the world? Our long time readers should not be surprised at this development, as we warned at Can China really ?de-couple? from a US recession? in January this year,

So, do you see China being caught in between? On one hand, a slowdown in US consumption will ultimately result in far greater proportion of contraction in investment spending in China, which accounts for the majority of Chinese economic activity.

Now, we will ask a very interesting question that has never been brought up by the mainstream media: Is this slowdown of the Chinese economy within the design of the Chinese government? Please note that we are not suggesting this slowdown is deliberately engineered by the Chinese government. Rather, we are suggesting that this slowdown could be part of the longer-term big picture plan.

Why do we say that?

Remember that we wrote at China to pull the plug? in March last year (2007)

… the Chinese leadership is highly concerned about the social and environmental impact of breakneck economic growth over the past few decades. There is worry that the status quo is ?unstable, unbalanced, uncoordinated and unsustainable.?

…

Assuming that this news is true, we can expect significant policy changes in China that will shift focus from the economy to the environment and social stability. This means the Chinese government will take steps to slow economic growth significantly in order for the non-economic aspects of the nation to catch up and for the economy to catch a breather. Indeed, China, for all her impressive economic growth, has a host of other serious problems as side effects.

…

Whatever the specific actions that the Chinese government take, we can be sure that there will be a great impact on the global economy and financial markets.

If you are a frequent watcher of the Chinese news media, you will notice that in recent times, the government showed its intention to develop the inner provinces. There are some snippets of images showing government initiatives in the agricultural heartlands of the peasant countryside (in Chinese lingo, that’s called “scientific farming”).

Thus, in the bigger scheme of things, this slowdown of the Chinese economy is still consistent with the Chinese government’s long-term plans. As we wrote in Can China really ?de-couple? from a US recession?,

The needs of the Chinese consumption economy is different from the US consumption economy. Some Chinese are rich. But some other parts of China are unbelievably poor. Wealth distribution in China is rather uneven and there are still many pressing social and environmental issues to be solved. Currently, the Chinese export economy is tooled towards US consumption. To re-tool and re-configure the Chinese economy towards its domestic needs requires a period of adjustment in which capitals are destroyed and built.

Our guess is that this is the adjustment period that China re-tooling its economy whereby capitals will be destroyed and built. The slowdown may still be significant, but that does not mean that the long-term commodity boom is over. As we said in What the commodities super-cycle is and isn?t?,

The point we are trying to bring across is that this secular commodity trend is a very long-term trend that will take decades to unfold. Within this secular trend, there will be cycles of bad years. But do not mistake these cycles of bad years as a permanent decline that will stretch on forever and ever.

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Posted in Economics/Finance, Looking Forward | No Comments »

What the commodities super-cycle is and isn’t?

Wednesday, November 12th, 2008

There are many skeptics of the commodity super-cycle. They have seen the rise of commodity prices as a bubble and consequently, see many resource stocks as being extremely over valued. The recent reports by the media of “fears of a global slowdown” and a significant slowdown of China prompted the sell-off in commodities and thus, add fuel to the belief that the commodity bull market is over.

On the other hand, there are many ardent believers of the commodity super-cycle theory. They sees that China and India are going to de-couple itself from the Western world and power the global economy regardless of what happens to the United States. Consequently, they see that commodity prices are not in a bubble and there is more to go. As a result, they start to bid up resource stocks to a sky-high level.

For us, we believe there are some truths in both camps. Yet at the same time, both camps tend to exaggerate the truths in their beliefs, resulting in bad long-term investment decisions. Both camps fail to understand the big picture and let the short-term price movement cloud their judgement. Today, we will repeat this explanation, for the sake of our newer readers.

Let’s turn to our earlier article, Understanding secular vs cyclical,

One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends. Confusion between the two can result in lost profits or worse still, losses. Before we can give examples of secular and cyclical trends, let us begin with definitions from the Encarta® World English Dictionary:

Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time

Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly

Now, let’s turn to Example of a secular trend- commodities and the upcoming rise of a potential superpower,

It has been said that today?s 21st century will see the secular rise of China. During the 20th century, China endured non-stop revolutions, civil wars, invasions, social upheavals, ideological experiments (e.g. Cultural Revolution, Great Leap Forward). It was the last couple of decades of the 20th century that China began to slowly emerge from her self-imposed shackles to catch up with the West. Napoleon once said that China is a sleeping giant that will shake the world when awaken. Today, despite the breakneck growth of the Chinese economy, China still have a lot of catching up to do in order to attain the same level of affluence, standard of living as the West- there are still hundreds of millions of peasants in China that is still relatively poor by Western standards.

To be a successful long-term investor, you have to appreciate the magnitude of the length and scale of this long-term secular trend. To help you do so, consider these real-life scenarios:

  1. Sydney is considering building a desalination plant that is projected to be completed in 2009. This project began as an investigation in 2004.
  2. A proposed brand new railway line from Rouse Hill in Sydney to the city may take up to 2015-2017 to complete.

So, you can see that major large-scale capital infrastructure projects can take several years to complete. In these examples, we are citing only a desalination plant and a railway line.

Now, take a look at China. They have plans to develop their nation towards the Western standard of living. They still have hundreds of millions of poor rural Chinese living in the countryside who have yet to taste the newly-found wealth of the coastal cities. Ditto for India. Combined, both of them have around 2.5 billion people. Can you imagine the colossal magnitude of the tasks ahead? If a Sydney desalination plant and railway line requires so much time, material and financial resource to complete, imagine how much more is needed to develop two nations with gigantic populations to a level that we, who live in the West, now enjoy? Whether they eventually succeed is irrelevant. The fact is, they are going to try, with major consequences to the rest of the world.

So, you should be able to see by now, the development of this secular trend will require decades and colossal amount of resources and commodities to come into fruition. This fact is the basis for the commodity super-cycle theory.

But life is not always so straightforward. As we said before in Will the China boom go in a straight line?,

However, the market always latches on to the generalities of a story and takes a simplistic projection of the story too far into the indefinite future. What do we mean by that? Put it simply, we do not believe that the rise of China will take on the path of a straight line.

As we said before, this trend will take decades to come into fruition. Within the decades, there will be business cycles, setbacks, problems and so on. As we wrote in that article,

Any time when the path does not look like a straight line upwards and take a temporary dive, the market will flip to the other extreme of this story and project extreme pessimism into the indefinite future.

Currently, with commodity prices taking a beating over the past couple of months, there are some who believe that the commodity bull market is over. Well, isn’t this taking a too short-sighted view?

Furthermore, let’s say China falls into a major economic correction in the near-term (see Can China really ?de-couple? from a US recession?)- we believe this is a real possibility. Does this mean that’s the end of the bull market for commodities (note: we are NOT talking about stocks here)? That is, will China’s long-term needs for resources and commodities going to decline from then on, forever and ever and return to the stone-age just because of a recession? We are sure there will be many experts pronouncing the end of the China growth story when such a day comes. To use an extreme example, it looked that way too for the US during the 1930s during the Great Depression. But history proved that’s not the end. In fact, the US went on to become a superpower in the 20th century. But on the other hand, if China falls into perpetual anarchy/revolution, then all bets are off and we will have to reconsider the commodity super-cycle theory.

The point we are trying to bring across is that this secular commodity trend is a very long-term trend that will take decades to unfold. Within this secular trend, there will be cycles of bad years. But do not mistake these cycles of bad years as a permanent decline that will stretch on forever and ever.

Understanding this big picture is one thing. Translating this understanding into a successful investment strategy that is suitable for you is another. In fact, it is tricky and many pitfalls and potholes lie on the road.

Firstly, since this is a multi-decade trend, some of us may not live that long enough to see it, let alone invest in it. For young working adults who have an expected lifespan of 50 or more years to go, it may be feasible to ride on this secular trend.

Secondly, for many of us, to take advantage of the commodity trend, the only available avenue of investment is through resource stocks. As we mentioned before in What is the meaning of ?oversold?? Part 2: Value perspective,

But having said that, remember that as we said before, all mines/oil/gas fields have a finite life. In the absence of potential new production from future exploration and mining development projects, a mining business will cease after a estimated number of years. The implication is that if the downturn is severe and long enough, some mining businesses may not last long enough to be able to realise the value of the long-term inflationary trend of commodities.

Thirdly, even though this secular trend have decades to run, you still have to decide (1) when is the right time to invest in it, (2) which commodity-related investment vehicles/stocks to put your wealth in and (3) at what price to pay for it. For example, if you enter during the cycles of bad years, you may end up with major disappointments in your investment results. As such, you will have to consult other research and professionals who will take your personal situation into consideration for advice as this is beyond the scope of this article.

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Posted in Commodities, Looking Forward, Market Observations | 10 Comments »

What lies ahead for the Australian economy in the coming years?

Sunday, April 6th, 2008

As we can see, over the past several months, there had been a lot of volatility in the global financial markets. As we said before in Why is the market so easily tossed and turned by dribs and drabs of data?, without the proper framework of sound economic theory, the outcome is that the lack of deductive reasoning and insights brought about the situation where the

… market gets tossed and turned by every minute variations of statistical information from economic reports. The end result is confusion and volatility.

Clearly, this shows that the media, pundits, investors, traders and other market participants do not know what is going on.

Today, we will present to you what we believe to be the long-term big picture. Our opinion is by no means a prediction in the forecasting sense- rather, it is just our feeling, intuition and guesses (maybe one day in the future, this opinion will be famously known as ‘insight’ or ‘foresight’?). Therefore, do NOT take our opinion as financial advice- we are not financial advisers and our conviction is that one should be ultimately responsible for one’s own investment and financial decisions.

Okay, here comes the meat…

Firstly, our belief is that the US economy is heading for a hard landing. Currently, Ben Bernanke’s forecast is that economic growth will pick up in 2009 after a possible mild recession. This is also the belief of the market, as it tentatively believes that the credit crunch is abating. We are sceptical of this view. After all, years of accumulation of bad debts, over-leverage, mal-investments and structural damage of the US economy cannot be simply brushed away with the turning of interest rate levers, money ‘printing,’ bailouts and sweet talks. As we explained 13 months ago in Marc Faber on why further correction is coming- Part 2, the liquidity contraction that started in the US is resulting in the process of global asset price deflation, especially house prices in the US. As asset prices deflate, this will bring about further bad debts, which in turn will bring about further deflation in a vicious cycle.

Next, as it especially applies to the Western developed world, the financial side of the economy has grown to be a major intertwined component of the overall economy. As we said before in Analysing recent falls in oil prices- real vs investment demand, the difference between the real and financial side of the economy is that the

.. real side [is] where you find the physical market for goods, services and labour. The financial side is where you find the flow of financial capital, assets and payments.

It can be argued that today, the financial side of the economy had grown beyond its original supporting role of efficiently and flexibly allocating capital for the real-side of the economy, to the point of playing one of the primary roles in the economy. In any case, both sides are interlocked hand-in-hand with each other, which means any shocks to the financial system will affect the real economy and vice versa. To illustrate this point, take the case of Australia. With the vast majority of working Australians parking their retirement savings through the superannuation system, which in turn distributes the savings into financial products (e.g. managed funds), which in turn further distribute these savings into the financial asset markets (e.g. stock market). Furthermore, even ownership of physical assets (e.g. property) requires credit, which in turn is sourced from the financial system. And when it comes to credit, developed Western economies like Australia have been gorging on them to fund anything from credit card debts, personal loans, car loans, stock investment through margin lending, store cards, etc. Therefore, you can see that any breakdown in the financial system will have serious and dire consequences on the rest of the real economy.

For Australia, it seems to be at a sweet spot. The voracious Chinese demand for commodities have been a windfall for Australia, which has vast reserves of resources to supply the Chinese economy. That, along with a highly advanced financial system helps spread the prosperity to the rest of the nation to some degree. But the dark side of this prosperity is the build up of leverage (debts) to a dangerously high level (see Aussie household debt not as bad as it seems? and Australia has no sub-prime debt? Think again!).

Now, there are dark clouds in the horizon. The global financial system had never been as interconnected as before in the history of capitalism. You can be sure that any trouble that begins in the US financial system will spread to the rest of the world. As of today, there are murmurs about the credit crunch being the most serious crisis since the Great Depression. As the financial system rot in the US economy spreads into its real side, you can be sure that Australia’s financial system will be severely affected as well. The Australian economy (along with other Western economies with advanced financial system like the US and UK economies) are highly leveraged (i.e. burdened with far too high levels of debt) both at the retail household level and at the institutional level. Already, we are hearing about bankruptcies, blow-ups and traumatic losses in the global corporate sector (e.g. Allco, MFS, Fincorp, Centro, Basis Capital, ABC Learning Centre, Tricom, Opes, Bear Stearns, UBS, Citigroup and too many more to list). The Australian household sector is feeling the debt stress (e.g. mortgage stress, housing affordability and rental crisis, soaring personal debt levels, etc). As we said before in Rising price of money through the demise of ?shadow? banking system),

Australians love their debt too much. From the large current account deficit (see Understanding the Balance of Payments), much of Australia?s debts are sourced from overseas. With the demise of the global ?shadow? banking system, the price of money in Australia has to rise too.

A highly indebted nation cannot afford to have the price of its credit rise without acute consequences. Thus, University of Western Sydney (UWS) Professor Steve Keen believes that a severe recession induced by debt deflation will arrive at Australia within 2 years.

The question is, will China save Australia from this?

For one, the rot in the global financial system may not affect the real side of the Chinese economy directly. This is because the Chinese financial system is still rather primitive compared to the advanced Wester economies. For example, there are still hundreds of millions of peasants toiling in the countryside. Those who migrated to the cities to toil under the factories are still not plugged into the developing Chinese financial system. Therefore, unlike the Western world, a bearish Chinese stock market does not necessarily forecast doom for the wider Chinese economy. As a result, the credit crunch that started in the US will have a limited impact on the real side of the Chinese economy. So far, this is good news for Australia (but Australia is not out of the woods yet).

Therefore, our opinion is that when the inevitable severe recession hits the Australian economy soon, the Australian mining (and related) sector will probably be the only bright spot in the darkness. In fact, we can argue that a recession may perhaps even be beneficial for the mining sector as much of the idle resources (caused by the recession) in the economy can be re-allocated to the mining sector (see How is Australia?s mining boom sucking resources out of the economy?).

But here comes the bad news.

Firstly, in a hard landing of the US economy, the real side of their economy will be crunched as well. Our theory is that this may lead to a more than proportionate contraction in the investment activities that dominates the Chinese economy, which will trigger a hard landing in the Chinese economy. Even if this theory turns out unfounded, there is another worry- the Chinese economy may not have enough resources supplied to it fast enough to maintain the trajectory of its economic growth. When that happens, the risk is that the trajectory may be shot down, resulting in the forced liquidation of all these mal-investments. The outcome is a big Chinese bust. Our article, Can China really ?de-couple? from a US recession? has the full explanation of our theory. When that happens, the last leg supporting the Australian economy will be kicked off. This is the worst-case scenario for the global economy (and by extension, Australia). Our feeling is that the coming Chinese bust may come with a time-lag after the US hard landing. If our theory about the more than proportionate contraction in Chinese investment holds true, then the time-lag may be shorter.

But yet again, this may not be all bad news in the longer run. If China’s rise is a secular event (see Example of a secular trend- commodities and the upcoming rise of a potential superpower) of the 21st century, then Australia can still climb out of this worst-case scenario.

Please note that we are not making any predictions here. Our vision is very far out into the future. Generally, the further one ventures into the future, the more likely unforeseen Black Swans will sneak in to turn one’s vision into fantasy. But as the old adage says, prepare for the worst but hope for the best.

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Posted in Looking Forward | 4 Comments »

Example of a secular trend- commodities and the upcoming rise of a potential superpower

Wednesday, March 19th, 2008

In the 19th century, Great Britain was the superpower of the day. She was an empire with colonies, commercial interests and trading posts all over the world. Her navy was unrivalled, patrolling the world’s seas. Her currency, the Pound Sterling, was much of the world’s primary reserve currency during the 18th and 19th century.

The 20th century saw the secular decline of the British Empire. Two world wars and economic weakness resulted in the Pound Sterling losing the reserve currency status. At the same time, the 20th century saw the secular rise of the United States into an arguably, empire.

It has been said that today’s 21st century will see the secular rise of China. During the 20th century, China endured non-stop revolutions, civil wars, invasions, social upheavals, ideological experiments (e.g. Cultural Revolution, Great Leap Forward). It was the last couple of decades of the 20th century that China began to slowly emerge from her self-imposed shackles to catch up with the West. Napoleon once said that China is a sleeping giant that will shake the world when awaken. Today, despite the breakneck growth of the Chinese economy, China still have a lot of catching up to do in order to attain the same level of affluence, standard of living as the West- there are still hundreds of millions of peasants in China that is still relatively poor by Western standards.

Now, take a look at the United States today. With only a few hundred million people, the US consumes more oil than any other country in the world. China, with four times the population of the US, still does not consume as much natural resources as the US. What if China is to attain the same level of affluence and standard of living as the US? Imagine the amount of natural resources that will be consumed! We are not even sure whether the earth has enough resources to accommodate a nation that is equivalent to four United States in terms of population.

At this point, we still have not yet included Russia, Eastern Europe and India into the picture. Assuming that all these nations are to rise towards the level of the West as China is doing right now, imagine the strain their demands will be imposed on Mother Earth!

It has been said that demand for commodities follow a cyclical pattern. During recessions, the demand for commodities decline and during booms, demand rises. For example, copper is nicknamed the metal with ‘PhD in economics.’ The demand for copper is said to follow the business cycle.

Then there are people like Jimmy Rogers who believe that commodities are now in a upward super-cycle. Of course, there are sceptics to this super-cycle theory because of their underlying conviction that commodity demand still follows a cyclical trend. But what is the underlying belief of the commodity super-cycle theory?

Armed with the understanding from our previous article, Understanding secular vs cyclical, you can see that the rise of China (and India, Russia, etc) that we just described is a secular trend. Thus, the demand for commodities that supports this secular trend must also follow a secular trend too.

But does that automatically mean that commodity prices will go up and up for ever and ever for a very long period of time? From the short-term bubble in metal prices in 2006, it is obvious that there are many speculators who misapplied the commodity super-cycle theory to the extreme. For example, copper prices climbed so rapidly in the short-term that by mid-2006, after having risen in a parabolic path, its prices suffered a major correction.

Now, cast your eyes back to the 1930s in the US. With hindsight, we can easily see that the Great Depression was a traumatic setback in the secular rise of the US in the 20th century. But in the end, the US survived and went on to become a world superpower. The same goes for China. Although we believe China may be facing a major correction down the years (see Can China really ?de-couple? from a US recession?), it does not necessarily mean that her secular rise in the 21st century will come to an end, unless something really drastic happens to plunge China back into the dark ages of the 20th century. As such, her demand commodities will always rise in the long run. The best phrase that explains this point is from our previous article, Understanding secular vs cyclical:

 Sometimes, within a larger secular trend, there are cyclical sub-trends.

As long-term investors, we should not lose sight of this big picture. Sure, commodity prices can even correct 50% in the short to medium term, but do not let the cyclical sub-trends cloud your understanding of the underlying secular trend.

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Posted in Looking Forward | No Comments »

Understanding secular vs cyclical

Tuesday, March 18th, 2008

One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends. Confusion between the two can result in lost profits or worse still, losses. Before we can give examples of secular and cyclical trends, let us begin with definitions from the Encarta® World English Dictionary:

Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time

Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly

All of us understand the concept of cyclical trends. The four seasons is a fine example- winter comes and goes and it will come back again. For the economy, booms are followed by busts, which are followed by booms again.

Secular trends, by definition, are far less common. An example of a secular trend is the falling trend of film photography. With the advent of digital photography, the usage of film in photography is in terminal decline- it will never rise again and film photography will eventually be consigned to history.

Now, let us introduce more complications into the picture:

  1. Sometimes, within a larger secular trend, there are cyclical sub-trends. For example, due to inflation, house prices will rise in the very long run, keeping place with inflation. But in the short to medium term, there are periods of price inflation and deflation.
  2. The converse is also true- within a cyclical trend, there may be secular sub-trends. For example, when you look at the history of the Chinese civilisation, you will see repeated cycles of dynasties- birth of a dynasty, growth, decay, fall and then birth of a new dynasty again. But within a dynasty, you will find trends that last more than a person’s lifetime, which is secular as far as that person is concerned.
  3. Sometimes, a secular trend is really a secular trend. For example, the decline and ultimate fall of the Roman Empire happened once in history and will not be repeated again.
  4. Sometimes, a cyclical trend is really cyclical. The four seasons is the best example.

How is all these abstract philosophy relevant to an investor?

Well, it is one thing to understand the difference between the two in our heads and another thing to act accordingly. For example, after more than 15 years of non-stop expansion in the Australian economy, there are many people, who through their investment decisions, believe that the business cycle is finally abolished. That explains: Why are the majority so wrong at the same time and in the same ways? To have a good perception of the nature of trends, we have to understand and look at the big picture and have a grasp of time frames that can go beyond our memory and even life-time.

So, in the coming articles, we will apply this understanding in the context of real-life investment decisions.

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Posted in Investor Education | 5 Comments »