# Pendulum of market cycles Credit for this idea goes to the legendary Howard Marks, a billionaire investor who is one of my heroes and has written many excellent memos and books: - [the most important thing](https://amzn.to/3u606bp) - [mastering the market cycle](https://amzn.to/3u2jh7h) - [list of memos](https://www.oaktreecapital.com/insights) Howard shares the idea of pendulums in his writing when discussing market cycles. The most easily understood is that of greed and fear. 1) Markets heat up, risk appetite increases, people become more greedy, prices go up (middle, right) 2) Markets hit bubble territory when all skepticism is gone, people are maximally greedy, prices skyrocket (right, right) 3) Markets start to cool, risk appetite decreases, people become more fearful, prices go down (middle, left) 4) Markets hit depression territory when all hope is gone, people are maximally fearful, prices hit major lows (left, left) The thing is, the pendulum picks up speed as it goes from one side to the other (prices go up, people become more greedy, prices go up even more) until it becomes too difficult for things to continue going in that same direction (no incremental next buyer), at which point the trend completely reverses and heads the other way. This happens across disciplines. Imagine a basketball player who starts "heating up" by making shot after shot (euphoric). He then gets overconfident (greedy) and starts taking lower percentage shots thinking he's unstoppable (like making a bad bet due to overconfidence or lack of healthy skepticism). This leads to missing shots, losing confidence, and beginning a cold streak (depression) where you're too afraid to even try because of the pain of missing so many shots in a row. It's not 1:1, but close enough to prove the point. The trick in markets, according to Marks, is to understand where you are at any given time, and position accordingly. Are prices extremely depressed and therefore "on sale" yet investors too fearful to deploy their capital? Chances are you've stumbled upon a wonderful time to buy assets cheaply. Yet, people allow emotions to get in the way, and fear to replace logic, so they miss the opportunity. Better for the few of us who master ourselves and are prepared to act when the time, and better yet the price, is right.