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Recommendation:

This book is a collection of parts related to cycles from Howard’s previous regular memos to investors, so the explanations regarding cycles and the relationship between cycles and investments are presented from a perspective that ordinary investors can understand, both logically and semantically. In particular, the mechanism of how the cycles of economic and market fundamentals interact with the psychological emotions of investors is explained, making it more relatable and easier for readers to grasp; at the same time, in the methods to cope with cycles, the first step is to "time the market and select stocks" (which is not the same as how ordinary investors understand timing and stock selection based on price); it also proposes long-term profit methods such as "asset allocation" and "reasonable positioning" strategies.

Setting aside many details and subtle differences, I believe that if we invest time in analyzing and researching in three major areas, we will gain the most:

• First, fundamentals. Fundamentals include industry fundamentals, company fundamentals, and security fundamentals. I refer to these fundamentals as "knowable"; you should strive to know more than others.

• Second, market conditions. You need to train yourself to strictly adhere to discipline, ensuring that the price you pay for purchases is reasonable and matches the aforementioned industry, company, and security fundamentals.

• Third, portfolio. You need to understand the investment environment we are currently in to determine the strategic layout of our investment portfolio to adapt to the investment environment.

There has already been a lot of analysis regarding fundamentals and market conditions. The following factors combined constitute the key elements of what we are familiar with as "security analysis" and "value investing": judging how much performance return a certain asset can generate in the future is usually measured by earnings per share or cash flow per share, and then estimating the current value of this asset based on these future performance forecasts.
What do value investors do? They strive to profit from the mismatch between "price" and "value." To succeed in this endeavor, value investors need to first take the following three steps:

• Step one, assess value. Quantify the intrinsic value of a certain asset now and how it will change over time.

• Step two, assess price. Compare and analyze whether the current market price of this asset is too high or too low, using the intrinsic value of the asset and historical prices, prices of other similar assets, and the overall "theoretical fair" price of all assets as benchmarks.

• Step three, build a portfolio. These value investors use the information from the above value and price assessments to construct their investment portfolios. Most of the time, their recent goal in the portfolio is to hold the assets that can create the most value, which have the greatest price appreciation potential, or have the best upside potential and downside risk ratio. You might say that constructing a portfolio and selecting assets is not complicated; it is merely about identifying the assets with the highest value and choosing those whose market prices are severely undervalued relative to their intrinsic value. Overall, this is basically correct in the long run. However, I believe that incorporating another factor into the entire process of building a portfolio will yield even greater profits, which is to prepare the corresponding investment portfolio layout for potential events that may occur in the market over the next few years.

In my view, at a specific point in time, the most effective way to optimize the portfolio layout is to decide what kind of balance to maintain between offense and defense. I believe that the balance between offense and defense should evolve with the times to respond to the overall changes in the investment environment, as well as the changes in the positions of many factors within the investment environment throughout their cycles.
The key lies in "calibration." Your investment scale, your capital allocation ratio across different opportunities, and the risks of the assets you hold—all of these should be calibrated, using a continuum from offense to defense as a measure... When the price of value is relatively cheap, we should actively attack; when the price of value is relatively expensive, we should retreat and defend.
"History keeps repeating itself," investment notes from September 2017.

I believe that for general investors in the early stages, rather than reading difficult books on economic cycles, market cycles, monetary policy, and some specialized financial psychology, it is better to first read this simple, practical book seriously, especially from the perspective of understanding the combination of economic cycles, market cycles, fundamental cycles, and psychological cycles, which can provide significant insights even for ordinary investors.

My insights:

Investment return = ∑ Invested assets x Asset return rate. The long-term return on investment ultimately depends on the following three factors:

∑: The proportion of various invested assets

The formula you provided is a way to calculate investment returns, describing the weighted sum of different asset investments and their return rates.

Specifically:

• Investment return is the weighted return of all assets.
• Invested assets are the investment amounts for each asset.
• Asset return rate is the return rate corresponding to each asset.
• ∑ represents summation, indicating that the returns of all assets are added together and weighted according to the proportion of each asset.

Here, the formula can be written as:

[
\text{Investment return} = \sum (\text{Invested assets} \times \text{Asset return rate})
]

Where:

• Invested assets are the investment amount for a specific asset.
• Asset return rate is the annual return rate of that asset or the return rate over another time period.

If you want to express it in a weighted average form, you can typically divide the investment amount of each asset by the total assets and then multiply by the corresponding asset return rate:

[
\text{Investment return} = \sum \left( \frac{\text{Invested assets}}{\text{Total assets}} \times \text{Asset return rate} \right)
]

Where (\frac{\text{Invested assets}}{\text{Total assets}}) is the proportion of each asset.

This indicates that the contribution of each asset is calculated based on its proportion in the overall investment portfolio.

The calculation formula for investment returns can be written as:

[
\text{Investment return} = \sum (\text{Invested assets} \times \text{Asset return rate})
]

The symbol "∑" here represents the summation of different assets, meaning you multiply the return rate of each asset category by the amount invested in that asset and then sum them up.

Example:#

Suppose you have three investment projects: stocks, bonds, and real estate, with the following invested assets and expected return rates:

1. Stocks:

   • Invested assets: 100,000 yuan
   • Asset return rate: 8%

2. Bonds:

   • Invested assets: 50,000 yuan
   • Asset return rate: 4%

3. Real Estate:

   • Invested assets: 150,000 yuan
   • Asset return rate: 6%

Step 1: Calculate the returns for each asset:

• Stock return = 100,000 × 8% = 8,000 yuan
• Bond return = 50,000 × 4% = 2,000 yuan
• Real estate return = 150,000 × 6% = 9,000 yuan

Step 2: Sum all returns:
[
\text{Investment return} = 8,000 + 2,000 + 9,000 = 19,000 yuan
]

So, your total investment return is 19,000 yuan.

This example illustrates how to calculate total investment returns based on different asset categories and their return rates.

Invested assets: The underlying assets of an asset determine the return rate / risk coefficient fundamentally.

Asset return rate: The long-term average return rate of that asset.

Simply understood by companies as the basic principle of asset allocation:

Investment return =

(Stock assets x Long-term average return rate of stocks) +

(Bond assets x Long-term average return rate of bonds) +

(Cash assets x Long-term average return rate of cash)

The proportion of various assets essentially determines the long-term average return level of the final investment.

For a deeper understanding, this can also be explained using the theoretical logic of this book.

Stock assets refer to enterprises and service units that represent social productivity, reflecting the technological development stage and replacement status of social production or services; the long-term average return rate of stocks is essentially close to the GDP growth rate of the country. Due to changes in population size and structural distribution, as well as uneven technological progress, this leads to economic development cycles, which in turn affect corporate profit cycles, thus forming larger fluctuations in stock price market cycles combined with human psychological expectation fluctuations;

The so-called "timing and stock selection," from the perspective of asset allocation, is to adjust the ratio and variety of stock assets within the overall assets. For example, during an economic downturn, reduce the proportion of stocks and change the held stocks to essential consumer goods production enterprises or public service companies that are stable and not affected by economic cycles. When the economy begins to recover, increase the proportion of stock assets and switch holdings to high-tech growth companies representing new technological directions.

Regarding so-called value investors, although they theoretically do not agree with "timing and stock selection" and other predictive investments, adhering to the corporate value investment concept and the investment strategy of holding excellent companies for the long term. However, the core idea of value investing is: "Buy and hold when the price of excellent companies is significantly lower than their future intrinsic value." This can also be understood as: the reason for designating excellent companies is that there is also a prediction of the corporate operating cycle, which means believing that the company will be in a growth cycle for at least the next 3-5 years, which is the principle of corporate operating cycles; at the same time, the buying condition of the price being significantly lower than the intrinsic value actually refers to buying when the market cycle arrives, causing the stock price of the company to drop significantly below its intrinsic value. This can also be interpreted as "timing," so even those value investors who claim not to focus on cycles are actually applying the principles of corporate cycles + market cycles.

Bond assets reflect the cost of social funds needed for new or additional investments, and their interest rate fluctuations are influenced by macroeconomic cycles, microeconomic policy influences, and the willingness of companies to reinvest based on future profit expectations. Credit cycles, interest rate cycles, and non-performing debt cycles directly affect the price fluctuations of debt assets, forming volatility cycles. The average long-term return rate of these assets has limited upward and downward fluctuations and is often allocated as a hedge against stock assets to smooth the overall investment return curve. I personally believe that understanding bond assets in asset allocation strategies as a buffer to stabilize investor psychological emotions is a better understanding. For stock value investors, bond assets are not valuable investment objects. The reason is simple: these assets have cycles, but they fluctuate within a certain range and do not spiral upward, so they lack long-term investment value. (Professional investment institutions or investors focusing on junk bonds and non-performing debt investments have high professional requirements and are not discussed as value investments.)

Cash assets mainly refer to monetary assets, and their average long-term return rate is generally close to the one-year fixed interest rate. From a purely return rate perspective, this type of asset has no long-term value. However, from the perspective of major asset allocation investments, a mandatory cash asset ratio can smooth the overall investment return fluctuations, benefiting investors in holding asset allocations for the long term. From a cyclical perspective, when there are no good stock or bond asset allocations, retaining cash assets is also the result of "timing and stock selection." For stock value investors, cash assets are only retained when the prices of excellent companies are significantly higher than their intrinsic values, meaning that the cash asset return rate is greater than the stock asset return rate, indicating that the market is in a state of frenzy. This is also a reflection of the market (stock market) cycle.

Finally, I would like to try to interpret whether Teacher Tang's investment philosophy is in line with the concept of cycles.

First, the selected companies meet the three major conditions of value investing, with long-term profit growth rates above 15%, and maintain growth for at least 3-5 years, indicating that the companies are in a development and upward cycle stage. Second, even for cyclical companies like Focus Media, although they are greatly affected by economic cycles, after observing two complete economic cycle cycles, Focus Media's revenue and profits have consistently risen after each cycle, aligning with the investment in companies that are in a growth stage; this is based on the understanding of cycles (corporate profit cycles) for the "stock selection" strategy;

Buying at 50% of the reasonable value after three years means buying when the company's price is significantly lower than its intrinsic value (where intrinsic value refers to the reasonable value three years later), which can also be seen as a "timing" strategy based on market cycle awareness;

Simultaneously, by combining the company's operating conditions with market temperature, interest rate environment, etc., appropriately adjusting the buying strategy (starting to buy stepwise above the ideal selling point, and stepwise selling above the ideal selling point) to adjust cash asset holdings can also be understood as offensive or defensive strategies and position management strategies.

The above thoughts are merely my attempt to provide some superficial understanding of whether various investment philosophies are interconnected.

The great way is simple, but it is not that easy to achieve. The path of investment remains unchanged in human nature, while the forms change.

The following part is the content of my speed reading notes. Since both the author and the translator of this book are excellent, perhaps after reading this part, you can have a basic understanding of the book.

Speed reading content:

(Originally expected to take about 30 minutes, but actually took nearly 1 hour, mainly because I read Liu Jianwei's translator's preface quite seriously.)

Introduction (Author, Translator, Book)

Preface (Author's Preface, Translator's Preface)

Table of Contents Structure (Main Directory, Main Content of Each Chapter)

Secondly, a quick rough summary of the book's content structure (Mainline Logic)

The translator of this book, Mr. Liu Jianwei, is a professional investor and also wrote the preface for the author's previous book "The Most Important Thing in Investing," so he is very familiar with the author's investment philosophy. He is also a manager of domestic public funds and has a profound understanding of timing, stock selection, asset allocation, and position adjustments in response to cycles, so I read Mr. Liu Jianwei's translator's preface very carefully.

Mr. Liu's summary is quite incisive. I have borrowed most of Mr. Liu's translator's preface as a summary note for my speed reading. (In fact, I think that if I read the entire book, my summary would definitely not be as good as Mr. Liu's.)

Below are the speed reading notes.

1. Introduction

Author: Howard Marks, "The Most Important Thing in Investing," Founder of Oaktree Capital.

Translator: Liu Jianwei (General Manager of Huatai-PineBridge Fund),

Publisher: CITIC Press, Publication Date: 2019-01-01

2. Chinese Version Author's Preface

The previous book "The Most Important Thing in Investing," along with the previously written investment memos, where those key contents related to cycles form the foundation of this new book about cycles.

3. Translator's Preface

Liu Jianwei has a strong connection with the author, having written the preface for "The Most Important Thing in Investing," and now translating the second book. Due to his understanding of the author and being a professional investor, the content of the translator's preface is essentially the best summary.

Since the summary is very incisive, I will quote most of it as a summary of the speed reading content.

4. Author's Preface:

Economies, companies, and markets, like the heavens and the earth, operate according to repeatedly recurring patterns. Some recurring patterns are generally referred to as cycles. The main reasons for the formation of economic cycles, corporate cycles, and market cycles are threefold: the first is naturally occurring phenomena; more importantly, the second reason is the ups and downs of human psychology; the third is human behavior resulting from the first two factors.

Economic cycles, corporate cycles, and market cycles have a significant impact on investors. If we pay attention to these cycles, we will be one step ahead and earn more returns.

To benefit the most from this book and to excel in dealing with the most important investment matter of cycles, investors must learn to identify cycles, assess cycles, understand the meaning of cycles, and act according to the directions indicated by cycles.

To master the philosophy of long-term winning investments, one must integrate many fundamental elements, none of which can be omitted:

First: Analytical skills are fundamental. You must cultivate your analytical skills, including financial, economic, and financial analysis skills. These basic analytical skills are the foundation of long-term winning investments and are essential, but having only these is far from enough.

Second: Market perspective is important. Understanding how the market operates is crucial. As your investment experience accumulates, your market perspective should also be supplemented, questioned, refined, and reshaped accordingly.

Third: Read extensively and learn a lot. Through reading, continuously accept beneficial new viewpoints you discover and discard the old viewpoints you find unhelpful, which will help you continuously improve the effectiveness of your investment strategies.

Regarding reading, one important point is not to only read books related to investments; you should also read many books unrelated to investments. Legendary investor Charlie Munger often says that broad reading is very beneficial; it broadens your horizons and helps you learn about the history and processes of other fields outside of investments, greatly enriching your investment toolkit and increasing many effective analysis and decision-making methods.

Fourth: Communicate more with peers. Engaging in discussions with fellow investors can greatly enhance your investment capabilities.

Fifth: Investment experience is invaluable. Nothing can truly replace your own personal experiences.

Every year, my views on investing change. Each cycle I experience teaches me lessons that help me better cope with the next cycle.

I believe that investing is a long-term endeavor; it is a lifelong pursuit, and we should never stop, stagnate, or become complacent.

4. Table of Contents

(The table of contents records a general description of the chapter content, allowing us to see the author's writing logic and habits.)

01 Why Study Cycles in Investing?

If we understand cycles, we can better align our investments with the trends of cycles: when the winning side is more favorable to us, we can increase our stakes, invest more funds to buy assets, and enhance the aggressiveness of our portfolio; conversely, when the winning side is unfavorable to us, we can exit the market and take our money off the table, enhancing the defensive nature of our portfolio.

02 Characteristics of Cycles

Events occurring during a cycle should not merely be viewed as one event following another, but rather as one event triggering the next. This is crucial for analyzing the causal relationships between cyclical events.

03 Laws of Cycles

Past events are greatly influenced by randomness, and thus future events will inevitably be as well; we certainly cannot predict them with complete accuracy. This is disheartening because randomness, what we commonly refer to as luck, makes our lives unpredictable, difficult to regulate, and hard to ensure safety.

04 Economic Cycles

Many factors can easily change, leading to variations in economic growth rates each year; even if the annual average economic growth rate aligns with the long-term trend line, the level of economic growth can differ from year to year.

05 Government Counter-Cyclical Regulation

Since cycles can swing to extremes, the tools to address extreme cycles should be counter-cyclical, and people can apply them according to their own cycles. Ideally, the cycle of the tools used to regulate economic cycles should be opposite to the trend of the economic cycle.

06 Corporate Profit Cycles

The process determining a company's profitability is complex and variable. Economic cycles have a significant impact on the sales of some companies, while for others, the impact is much smaller. This is mainly due to differences in operational leverage and financial leverage levels among companies.

07 Investor Psychology and Emotional Pendulum

Corporate cycles, financial cycles, and market cycles often overshoot during upward phases and inevitably overshoot during downward phases as well. This tendency for cycles to overshoot is a result of the excessive swings of the investor's psychological pendulum.

08 Risk Attitude Cycles

In a bull market, we hear many people say, "Risk? What risk? I don't see how anything could go wrong; everything has been great so far. Regardless, risk is my friend; the more risk I take, the more I might earn." Later, when the market turns sour, many investors completely change their tune to a much simpler statement: "I don't care about making an extra penny in the market; all I care about is not losing any more money."

09 Credit Cycles

Exceptional investments do not come from the quality of the assets purchased, but from the high cost-performance ratio of the assets bought—assets of decent quality at low prices with potentially high returns and limited risks. The phase when credit cycles suddenly close their doors is most conducive to creating a situation where cheap goods are everywhere, more so than any other factor.

10 Non-Performing Debt Cycles

In times of clarity, lending institutions and bond purchasers insist on having a sufficiently large margin of safety to ensure that borrowers can repay principal and interest even if conditions worsen. As competition to lend intensifies, lending institutions eager to quickly lend money will provide loans to less worthy borrowers and accept less robust debt structures, leading to newly issued bonds lacking sufficient margins of safety.

11 Real Estate Cycles

In the matter of buying houses, the influence of widely circulated sayings is particularly pronounced. However, what people ultimately learn is that no matter how correct these sayings may seem, they cannot guarantee that your investment will not lose money, because if the cost price of your investment is too high, no reasoning will hold.

12 Market Cycles—The Integration of Cycles

For those who do not understand investing, their investments inevitably end in tragedy, as it is unavoidable that if this process based on erroneous judgments does not reach extremes, the market will not rise to the peak of a bull market, which is also the starting point for market reversals and declines; similarly, the market will not fall to the lowest point of a bear market, which is also the starting point for rebounds.

13 How to Respond to Market Cycles

The key to determining your investment performance lies not in what you buy, but in how high the price you pay for it is. The price you pay, that is, the market price of the security and its valuation level relative to its intrinsic value, depends on investor psychology and the resulting investment behavior.

14 Market Cycles and Investment Layout

Whether you can successfully layout an investment portfolio to respond to future market trends primarily depends on what you do—whether to concentrate more forces on offense or defense; secondly, it depends on when you do it—based on your exceptional insights into the future market trends indicated by cycles.

15 Limitations in Responding to Cycles

It is entirely reasonable to want to change your investment portfolio layout based on an understanding of market cycles to enhance long-term investment performance. However, you must understand that this idea requires you to possess advanced skills, and truly realizing this idea is very difficult.

16 Success Itself Also Has Cycles

Good assets become bad assets, and bad assets become good assets; this is the cycle of recurrence. The key to investment success is understanding cycles; everything has cycles, and thus there will inevitably be ups and downs and repeated cycles within cycles.

17 The Future of Cycles

Human tendencies to swing to extremes will never cease. Therefore, these extremes must ultimately be corrected, rather than the occurrence of cycles changing. Economies and markets have never followed a straight line; they did not in the past, and they certainly will not in the future.

18 Essentials of Cycles

I have selected some paragraphs from the book and compiled them together because I feel that the content of these paragraphs is very important and can greatly help you understand cycles, the causes of cycles, and how to respond to cycles.

V Summary:

The three major elements of success in life are timing, location, and harmony, with timing ranking first. The three major elements of success in investing are timing, stock selection, and allocation, with timing ranking first. The most important aspect of timing is cycles, and the best book on cycles is this one.

The greatest feature of this book is its combination of fundamentals and psychology to discuss investment cycles. The technical analysis faction discusses market cycles by only looking at market price data, while the macro analysis faction mainly looks at macroeconomic and monetary data. Essentially, both are data-driven, from model to model, which is neither practical nor effective. This book opens a third path, discussing the basic trends of long market cycles from the perspective of economic and corporate fundamentals, and how market short cycles often deviate significantly from the basic trend from a psychological perspective. The integration of fundamentals, psychology, and market aspects creates a mutually causal and interdependent relationship. This interpretation of cycles is both realistic and easy to understand and apply.

Like other good books, this one also has a clear main line. The main line can be divided into three stages: understanding cycles, analyzing cycles, and responding to cycles. These correspond to the three major parts of this book: understanding the three major laws of cycles, analyzing the three categories of nine types of cycles, and responding to cycles with three operational steps.

The content structure of this book: (Essentially quoting Mr. Liu's translator's preface)

Part One: Understanding the Three Major Laws of Cycles (Chapters 1-3)

The first major law: cycles do not follow a straight line but a curve.

The second major law: history will not repeat the past details, but it will repeat similar processes.

The third major law: it is better to take extremes than to take the middle ground: thus, the market either moves to extremes or moves towards extremes.

Part Two: Analyzing the Three Categories of Nine Types of Cycles (Chapters 4-12)

The first category of cycles: fundamental cycles: (economic cycles, government counter-cyclical regulation, corporate profit cycles)

Economic cycles:

Determined by GDP (Gross Domestic Product) cycles, influenced by two main factors: the total population participating in production and production efficiency.

Government counter-cyclical regulation:

This is manifested in government counter-cyclical adjustments to smooth economic fluctuations, mainly relying on monetary policy and fiscal policy, but government officials cannot accurately predict economic cycles.

Corporate profit cycles:

Theoretically, the total output of all companies equals a country's GDP, but the amplitude of corporate profit fluctuations is two to three times that of GDP fluctuations, or even larger. The main reason for this is that companies use two major leverages—operational leverage and financial leverage.

The second category of cycles: psychological cycles: (psychological and emotional pendulum, risk attitude cycles)

This is the most important and exciting content in the book. While psychology and emotion are strictly different, they are difficult to distinguish, so the author combines the two for practical application, where psychology is emotion, and emotion is psychology.

Investing is like two sides of a coin, inseparable. The front side is chasing profits, and the back side is bearing risks.

Psychological Pendulum

From the perspective of chasing profits, investors' psychology and emotions regarding securities swing back and forth like a pendulum between the extremes of fear and greed. This is a brilliant metaphor that captures that which is difficult to articulate.

The emotional fluctuations in the securities market resemble the movement of a pendulum. This pendulum swings back and forth, forming an arc, with the center point of the arc perfectly describing the "average" position of the pendulum. However, in reality, the pendulum spends very little time at this center point, passing through it quickly. Conversely, the pendulum spends almost all its time at the extremes, with each end of the arc representing an extreme point; the pendulum is either swinging towards an extreme point or away from it. However, whenever the pendulum approaches an extreme point, the inevitable result is that it will reverse direction and swing back towards the center point, whether sooner or later, it will definitely reverse. In fact, it is the movement of the pendulum towards the extreme point that provides the energy for the subsequent reversal back to the center point.

This phenomenon of swinging from one extreme to another is the most certain characteristic of the investment world; investors' psychology swings like a pendulum, spending much time at extremes, either moving towards one extreme or the other, and rarely staying at the center point, seldom taking the happy and pleasant middle path.

Those who have spent some time in the securities market will be amazed to find that the same securities, the same market, the same companies, and the same investors can have completely opposite psychologies and emotions, and each of their reversals is believed to be correct, only to reverse again after that. This fickleness can be aptly described with the pendulum metaphor.

Buffett says that his lifelong investment success relies on one principle: be fearful when others are greedy, and be greedy when others are fearful. In fact, when investors invest, their opponent is the market; here, "others" refers to the market. Howard Marks likens the psychological and emotional fluctuations of the market to a pendulum swinging between greed and fear. This aligns perfectly with Buffett's famous saying.

Risk Attitude Cycles

_From the other side of investing, bearing risks, investors' attitudes towards risks also undergo cyclical ups and downs, swinging from excessive risk aversion to excessive risk tolerance. The author first clarifies that the correct definition of risk is the possibility of loss, not the academic definition of volatility, and dispels a widely circulated misconception: high risk leads to high returns. From the perspective of risk as the possibility of loss, low risk can yield high returns because the lower the possibility of loss, the greater the possibility of profit. The author points out that investors often view returns and risks as a point rather than a range of possibilities.

The third category of cycles: market cycles (credit cycles, non-performing debt cycles, real estate cycles)

In this book, market cycles generally refer to stock market cycles. However, in a broader sense, credit markets, non-performing debt markets, and real estate markets also belong to market cycles, so for convenience, I will categorize them all under market cycles.

Credit Cycles

Compared to other cycles, credit cycles have a particularly significant impact, but there are far fewer books discussing credit cycles, making it a major highlight of this book.

In good economic conditions, even the worst companies can borrow money; in poor economic conditions, even the best companies find it difficult to borrow money. The author uses the metaphor of a window to vividly illustrate this, transitioning from wide open to suddenly shut, representing a drastic change, and the speed of this change is rapid. Lending institutions apply this to corporate loans as well as personal housing loans. Please note that the issuance of credit is managed by people, and so is bond investment.

Credit cycles are particularly sensitive to economic cycles, have a significant impact on corporate profit cycles, and greatly influence the economy and the market. The subprime mortgage crisis was essentially a crisis caused by the extremes of credit cycles, which in turn triggered the global financial crisis.

Non-Performing Debt Cycles

Non-performing debt investments refer to the defaulted loans and bonds of bankrupt companies, which Chinese banks refer to as non-performing assets.

Real Estate Cycles

These are the root cause of the U.S. subprime mortgage crisis and the cycles that most concern Chinese people.

Real estate cycles have three major characteristics:

The first characteristic: they are physical; the time from conception to delivery of products can take several years, making the fluctuations of real estate cycles particularly large, thus greatly impacting the profitability of real estate investments.

The second characteristic: developers often see only the trees and not the forest; they only see themselves and do not consider that many peers may have the same thoughts, resulting in a "herd mentality," leading to either an overheated or overly cold market.

The third characteristic: investors blindly believe that stock prices and housing prices will always rise, but the author uses the example of the Amsterdam gentleman's canal area, where it took 350 years for housing prices to double, to illustrate that one should not believe in legends; they are not facts.

Stock Market Cycles

Stock market cycles have three characteristics:

The first characteristic: from a multi-layered composition perspective, stock market cycles encompass all other cycles, combined with the influence of randomness, forming the volatility cycles of the stock market, which are influenced by other cycles and also influence other cycles. In simple terms, fundamentals combined with psychology determine the market aspect. The market aspect, in turn, affects the fundamentals and psychology.

The second characteristic: in terms of volatility amplitude, prices can deviate significantly, because investors are not rational economic agents; their psychology and emotions fluctuate greatly, leading to significant deviations between the buying and selling prices of assets and their values. This presents both investment opportunities and risks.

The third characteristic: in terms of process, both bull and bear markets have three stages. The three stages of a bull market are: a few people see improvement in fundamentals, leading to a slight rise in the stock market; some people see improvement in fundamentals, leading to a moderate rise in the stock market; everyone sees improvement in fundamentals, leading to a significant rise in the stock market. Conversely, the same applies to the three stages of a bear market. In Buffett's words, the smartest investors act first, while the last to act are the fools.

Part Three: Three Steps to Respond to Cycles (Chapters 13-16)

Responding to cycles involves three steps: awareness, courage, and preparation.

In summary, responding to cycles involves three steps: awareness, courage, and preparation. Chinese people often say that courage and awareness go hand in hand. In fact, awareness comes first, followed by courage; having courage and awareness is still not enough; one must also be prepared for contingencies.

Awareness—What position is the market currently in within the cycle? Understanding the present is crucial for grasping the future. The author's method is to take the market's temperature, using key indicators to measure market valuation levels and whether market sentiment is overheated or too cold.

Courage—Be fearful when others are greedy, and be greedy when others are fearful; this is also the secret to Buffett's investment success.

Preparation—You must be prepared for mistakes in three areas. The first is the mistakes you make; everyone makes mistakes. The second is unexpected events from outside the market, such as storms, floods, earthquakes, tsunamis, nuclear leaks in Japan, Brexit, and the China-U.S. trade war. The third is errors inherent to the market itself; the market can remain wrong for longer than you can stay solvent! The greatest secret of investing is to survive; it is not the victors who are kings, but the survivors.

To achieve long-term investment success, the key is to maintain a balanced investment portfolio layout.

The author suggests that for investment success, one must maintain an appropriate balance across three pairs of key factors:

Cycle positioning and asset selection (timing and stock selection)

Aggressive and conservative (offense and defense)

Skills and luck

These three pairs of factors are like the left hand and right hand, the left leg and right leg, the left brain and right brain; none can be omitted, and they must maintain an appropriate balance. However, in reality, leaning towards the correct side at the right time is what maintains true balance.

This book discusses cycles, yet investors diligently studying cycles in pursuit of investment success often overlook that investment success itself also has cycles. Failure is the mother of success, and success is also the mother of failure.

In fact, this book can be summarized in one sentence: cycles are always present.

We often fail in investments because we think "this time is different," only to later realize that this time is the same; cycles are always present. In investing, you may not believe in anything, but you must believe in cycles. As long as there are people, there are cycles. Just like Mark Twain's famous saying: History does not repeat itself in details, but it does repeat itself in processes.