Dancing with the Cycle: Lessons from Howard Marks

In the high-rise quiet of Los Angeles, Howard Marks sits in his corner office at Oaktree Capital Management, scribbling another memo to clients. His words—never flashy, always measured—have become gospel for those who seek not the frenzy of markets, but their rhythm. For decades, Marks has been whispering the same truth: markets move in cycles, and ignoring this fact is perilous.

Understanding his philosophy means stepping into the complex ballet of economic expansion and contraction, optimism and pessimism, risk-taking and risk aversion. This is not the realm of spreadsheet precision—it is the realm of psychology, history, and temperament.

The First Principle: Everything is Cyclical

Marks opens with a deceptively simple observation: "Most things prove to be cyclical."

From corporate earnings to credit spreads, from investor psychology to GDP growth, cycles permeate the financial world. These cycles don't repeat perfectly, but they rhyme with uncanny regularity.

The Market Cycle Clock, often attributed to strategists, finds its spiritual home in Marks’s memos:

1. Recovery begins with despair.

2. Optimism grows as prices rise.

3. Euphoria follows, untethered from fundamentals.

4. Fear returns, as reality bites.

5. Panic sets in, resetting the stage.

Marks’s genius is in refusing to predict the timing of these cycles. Instead, he focuses on recognizing where we are—a feat that requires a rare blend of skepticism, humility, and pattern recognition.

The Second Principle: Second-Level Thinking

In his book The Most Important Thing, Marks introduces the essential weapon in the investor’s arsenal: second-level thinking.

Second-level thinking recognizes that markets are not a weighing machine, but a voting machine—filled with narratives, biases, and competing interpretations. To profit consistently, you must not only be right, but right when others are wrong.

The Third Principle: Risk is Not Volatility

In a world obsessed with the Greeks—beta, sigma, alpha—Marks reminds us of an old truth:

He sees risk as subjective and cyclical. In times of euphoria, investors underestimate risk. In times of despair, they overestimate it. The real work of the investor, then, is not to chase returns, but to manage risk when others forget it exists.

This aligns beautifully with the fundamental structure of risk-adjusted return:

Expected Return = Risk-Free Rate + Risk Premium

In booms, the risk premium gets compressed. Marks warns: when risk is underpriced, danger is greatest.

The Fourth Principle: The Pendulum Swings

Marks often describes markets as a pendulum swinging between extremes:

• From greed to fear

• From optimism to pessimism

• From risk tolerance to risk aversion

Rarely do they rest at the midpoint. The savvy investor observes the amplitude and momentum of this swing.

Market Sentimentₜ = Mean Sentiment + Deviationₜ Deviationₜ → Mean Reversion

When deviation is too extreme—either direction—the pendulum begins its arc back. Knowing this, Marks writes not to time the swing perfectly, but to lean against the extremes.

The Final Principle: You Can’t Predict, But You Can Prepare

In his investment memos, Marks emphasizes positioning over prediction. You don’t need to know when the storm will hit—just whether you're in a sailboat or a submarine.

He frames the investor’s mindset through defensive readiness:

• When risk is underappreciated, hold more cash.

• When pessimism is pervasive, lean into risk.

• When everyone is confident, question your assumptions.

This cyclical awareness is deeply behavioral. It rewards contrarianism—not in rebellion, but in recognition of the tides of psychology.

Howard Marks in a Sentence

He is less a quant and more a philosopher of markets. His work does not provide formulas to predict the next crash. Instead, he equips you with a compass for the fog.