1. Economic cycles represent correction of excesses that take place over periods of time.
2. During an up cycle,
a) there is an overall optimism,
b) capital is available to set up several new businesses as investors are confident about future,
c) economic activity expands with assumptions about revenues, costs and profits riding on growing consumption and demand, and
d) investment increases as revenues increase.
3. Inevitably, however, upcycles can't last forever unless unlimited capital is available at low costs and demand remains high even at higher prices.
4. When upcycles collapse, businesses soon reach the bottom, trying to protect against failure, while cutting investment and costs, and looking for demand for their products and services.
5. The cycle of boom turns to bust, then moves on to recession, followed by recovery, and back again.
6. The reluctance of investors, in emerging markets like India, to build economic cycles into an investment strategy comes from a dominance of structural changes to the economic environment that have influenced returns for a long time, but which has become tougher than before.
7. The problem with this approach is that ordinary investors assume risks they are ignorant about and could be hurt if these risks manifest, as cyclical factors inevitably come into play, perhaps with a lag.
8. A shift is, therefore, needed in the investor mindset because:
a) investing cannot always be about making opportunistic short-term gains,
b) return expectations should be realistic as windfalls cannot be a regular, sustained event,
c) the risk in investing needs to be acknowledged,
d) it is time investors learnt to look out for economic cycles, instead of waiting for the next unexpected windfall.
2. During an up cycle,
a) there is an overall optimism,
b) capital is available to set up several new businesses as investors are confident about future,
c) economic activity expands with assumptions about revenues, costs and profits riding on growing consumption and demand, and
d) investment increases as revenues increase.
3. Inevitably, however, upcycles can't last forever unless unlimited capital is available at low costs and demand remains high even at higher prices.
4. When upcycles collapse, businesses soon reach the bottom, trying to protect against failure, while cutting investment and costs, and looking for demand for their products and services.
5. The cycle of boom turns to bust, then moves on to recession, followed by recovery, and back again.
6. The reluctance of investors, in emerging markets like India, to build economic cycles into an investment strategy comes from a dominance of structural changes to the economic environment that have influenced returns for a long time, but which has become tougher than before.
7. The problem with this approach is that ordinary investors assume risks they are ignorant about and could be hurt if these risks manifest, as cyclical factors inevitably come into play, perhaps with a lag.
8. A shift is, therefore, needed in the investor mindset because:
a) investing cannot always be about making opportunistic short-term gains,
b) return expectations should be realistic as windfalls cannot be a regular, sustained event,
c) the risk in investing needs to be acknowledged,
d) it is time investors learnt to look out for economic cycles, instead of waiting for the next unexpected windfall.