Can You Profitably Time an Investment Cycle: The 4 Phases

An investment cycle has four parts:

• Accumulation
• Mark-up
• Distribution
• Mark-Down

Accumulation

The accumulation part is in the late stages of a substantial market correction or crash. Many investors are throwing in the towel. But, this is when the smart money enters or re-enters the stock, bond, and real estate markets. Can you profitably time an investment cycle by purchasing at this time? The key to success at this point is to be sure that the market has bottomed out. At this time competent intrinsic value calculations will indicate what investments to buy.

Mark-up

The start of the mark-phase of the investment cycle is when many investors get confused. Unemployment is worsening but many stocks are going up in price. This is because the market discounts what it believes will happen. The prices of stocks and other investments have already bottomed out. Smart investors are cherry picking the best opportunities and starting to see gains.
The mark-up phase becomes self-perpetuating as more and more investors re-enter the market and prices get bid up across the board. This is when the rising tide raises all ships. Unfortunately, late-entering investors expect to see the same profits continue and they bid up prices beyond what fundamentals will support. Can you profitably time an investment cycle at this point? Again, you should rely on intrinsic value, as some companies will still be making money and are good long term investments, while others will be due for a fall.

Distribution

The distribution phase of the investment cycle is when the folks who bought in phase one and early in phase two start to take their profits. There are as more sellers than buyers. Prices become volatile. Those who successfully anticipate the swings of the market will profit and those who do not will sustain losses. Can you successfully time an investment cycle at this point? Yes, you can. You can start to take profits and adjust your portfolio to a more defensive posture.

Mark-down

The mark-down phase of the investment cycle is when prices are in steady decline. This can be gradual or it can be precipitous, when driven by an economic recession, social unrest, or war. Depending on whether or not you are still invested at this point, the question will be if you can hold on until the cycle starts again after the markets have bottomed out. The key factor at this point is the quality of the investment you have. If you own investments that are likely to weather the storm and even come out stronger on the other side, you might as well hold on. If you entered the market late and purchased junk, you might as well sell for pennies on the dollar before your investment is worthless.

Can You Profitably Time an Investment Cycle? PPT

How to Choose Profitable Investments 1: First steps

Years ago we wrote about how to invest $10,000. Here are some basics about how to choose profitable investments and get on the road to profits.

In deciding how to invest 10,000 dollars let’s look at investment horizon, risk tolerance, growth versus income, and diversification as the first considerations on the way to deciding what is a good investment for our first stock.

How we envision our investments will help us focus on the stocks that fit our needs. If we are looking to save money for retirement we may choose different investments than if we are saving for a down payment for a house and hope to have built up a substantial amount of capital in, lets’ say, five years.

Our risk tolerance should be built upon our ability to absorb the loss of our investments in their entirety. Someone close to retirement may want to look at dividend stocks more closely than growth stocks and a younger investor will certainly want to cash in on the exponential growth of a strong growing company.

Diversification is always important as it lets us benefit from growth in different market sectors and commonly cushions losses in one stock/sector with gains in another.

In this article we will focus on investing for the long term, building wealth over the years, and having a healthy nest egg for a rainy day. In this case how to choose profitable investments depends on intrinsic value analysis.

How to Choose Profitable Investments 2: Intrinsic value and value investing

We may seem to have written a lot about intrinsic stock value but it is a subject that bears repeating. When you look for a profitable investment you do not necessarily look for a stock that has just gone up in price. What you want is an investment that will appreciate in the future. But, how can you know that? There are lots and lots of mathematical formulas which you can apply to the calculation of intrinsic stock value.

For example, you can look at expected dividends and pick a stock which has paid dividends for decades and invest with the expectation of continued dividends.

Or, you can look at the margin of safety of a stock which is cash in the bank, assets unencumbered by debt, and the strength of its products and services within its market niche.

This last approach is basic to how to choose profitable investments.

How to Choose Profitable Investments 3: Tech products versus a Snickers bar

Which companies will be profitable investments in the future depends on their ability to make money year in and year out. There are two ways this happens. First, the company has a product, like Clorox bleach, Coca Cola or a Snickers bar. These are established products that have strong brand names and are very unlikely to be replaced by competitors. The second way is that the company is able to continue to invent new and better products and services.

We like to refer to Warren Buffett on these pages because he is the epitome of the successful long term investor. He once said that he avoided tech stocks because he did not have a clear idea of how many of their products would be viable in five years and therefore how much they would be worth. On the other hand he noted that he was pretty sure how much folks would pay for a Snickers bar five years in the future.

For the beginner, how to choose profitable investments is to stick with what you know or educate yourself to know more. Having a basic idea of how the company makes its money and how it will continue to do so is the first, best and eternal approach to profitable investing.

How to Choose Profitable Investments PPT