If you watched western movies as a kid you would have seen cattle stampeding towards a cliff, which is a bit reminiscent of investors in the share market with the GFC. Just like in the westerns, many blindly followed the herd only to fly over the edge into the financial chasm.
The share market is about mass psychology, with fear and greed driving the market. Like the cattle, a lot of investors don’t know how to see what lay ahead when the herd starts running so they expose their investments to significant risks, which is unnecessary.
Investors tell me that they would like to be more confident. To do this, I suggest they put to one side what they know about the stock market and do the opposite of the herd – that is to sell when everyone else is buying, and to buy when others are selling en masse. The challenge is that most of us have been told by industry experts that you cannot time the market like this, yet a study of market cycles proves that actually you can.
While to me there is never really a bad time to invest in quality assets that are rising in value, there are certainly times that are better to invest. But how do you know when prices are near lows and likely to rise, and when will they most likely fall? The answer is cycles.
We only have to look around to know that cycles exist – for example, the moon has a cycle that affects crops, tides and human emotions. Economic cycles, business cycles, share market cycles and property market cycles are all influenced by human behaviour.
In the share market we have cycles lasting from minutes to centuries, running from low to high and back to low, with some important cycles being every four, 18 and 40 years. The exact timing of a high or low of a market is not something that is consistently predictable by even the best experts, but the study of cycles allows you to determine the likely direction of a stock or market and when that direction may change so you can buy “at the right time”, which is vital if you want to achieve double-digit returns.
My tips to discovering cycles are:
Go to an online broker and look at a monthly bar chart of the stock or market you are interested in, over the longest possible time frame.
Find repeats on the chart of major lows separated by a similar amount of time, such as every four years.
Determine approximately when the next significant low is likely to occur by adding four year to the last low.
This is an article published in the ASX newsletter earlier this year which talks about cycles, especially the 40-year cycle.
This is a video of an ASX Investor Hour seminar which also talks about cycles and how they unfold. Both links are aimed at the investor market and explain things in a very simple manner.