বাজারের চক্র Market cycles

Markets do not rise in a straight line, and they do not move at random either. They move in cycles: a few good years, then a fall, then a long quiet, then it starts again. Nobody can say in advance when the cycle will turn, but you can usually tell roughly which phase you are in, and that much is enough.

The lesson on crowd behaviour showed why people move together. This one puts that movement on a timescale, and shows why the most important lesson of cycles for an ordinary investor is this: cycles will happen, so arrange your money to survive any phase of one.

The four phases

Every large cycle runs through the same four phases, and each phase has its own language. Learn to recognise the phase and the headlines start telling you where you are standing.

Quiet. The years after the last fall. Turnover is low, the market is not in the news, and the people who lost money never came back. Prices are often cheap, and buying now is what pays best. It is also the hardest time to buy, because nobody encourages you.

Belief. Company results start improving, prices rise slowly, and those who stayed can see gains. This phase is usually the longest and the safest. The rise is deserved, because real earnings sit under it.

Excitement. Here the relationship inverts. Prices rise because prices are rising. New people arrive, borrowed buying grows, and a company with no earnings at all triples. This is when the largest amount of money enters the market, at the worst prices.

Break. Some shock arrives. The shock is usually small, but borrowed money magnifies it: a fall triggers margin calls, forced selling follows, and the selling pushes prices lower still. What took months to build goes in weeks. Then it is quiet again.

Two breaks in Bangladesh

The 1996 crash was a sudden flood of money into a small market. The index multiplied within months and then took years to come down. Manipulation was found, the rules were tightened, and ordinary people stayed away from shares for most of a decade.

The 2010 one was bigger, because by then the market was bigger and credit was easier. Bank and broker money funded buying, new BO account numbers hit records, and companies with modest earnings traded at extraordinary prices. The turn came at the end of December, and most of 2011 was spent falling.

The arithmetic of a fall is brutal

One thing is misunderstood again and again. A 50% fall is not undone by a 50% rise. If 100 becomes 50, getting from 50 back to 100 takes 100%. The deeper the fall, the more lopsided the road back.

Which is why avoiding a large fall is worth more than catching a large rise. And the most effective way to avoid one is not prophecy but three dull habits: do not borrow, do not put everything in at once, and do not keep money you will need within a year in the market at all.

Signs of which phase you are in

There is no precise gauge, but a handful of things appearing together should raise your guard. These are not predictions, they are a temperature.

Notice that not one of them is about the price level. A price on its own says nothing; the relationship between price and earnings, the amount of borrowed money, and the flow of new participants make the picture together.

What to do inside a cycle

The answer is disappointingly monotonous, and that is its strength. A fixed amount every month, on the same day, whatever the market says. That gets you fewer shares when there is excitement and more when it is quiet, which runs precisely opposite to the crowd.

The second job is even simpler: write it down. Which phase you believe you are in, and why. Reading it back six months later teaches you one of two things: you were right and the reasoning worked, or you were wrong and you can see which sign misled you. Both are valuable.