What do investors and farmers have in common? Their work is dominated by cycles.
A farmer who does not understand cycles — the ebb and flow of the seasons, a time to plant, a time to harvest, and a time to let the ground lay fallow — will not remain a farmer for long.
Investors, too, have much to gain from understanding cycles (and much to lose from ignoring them).
That is why we’ll talk more about cycles in the coming weeks — and why we are dramatically expanding our cycle work as an area of research focus, not just in the short-term but for years to come.
The goal is to help you, the investor, make money — and to avoid losing money, which is sometimes more important — and cycle awareness plays a powerful role in both of those areas.
What is a cycle exactly? It’s a big and sprawling area, so we’ll start with a big picture definition.
The Oxford English Dictionary defines a cycle as “a series of events that are regularly repeated in the same order.” That is about as all-encompassing as it gets. The word “cycle” started gaining notice in the early 1800s and rose in frequency of use over the next two centuries.
The most important cycles — the fundamental ones that drive not just human life, but all biological life — relate to the rotation of Earth on a tilted axis, and the elliptical regularity of Earth’s orbit around the sun.
Every morning the sun rises, and every evening the sun sets. To the human eye, the sun appears to move across the sky, rising in the East and setting in the West. We know, however, that the sun’s position is fixed relative to ours, and it is the Earth itself that rotates.
This is perhaps the ultimate example of a cycle: The progression of night following day, in an endless repeated pattern, is technically not guaranteed — at some point “the last sunrise” will occur — but it is just about the highest probability event one can imagine, and the rhythm of day and night is all-encompassing. That day-and-night rhythm impacts literally everything; nature is organized around it; the rhythm was here before humanity and will remain after humanity is gone.
Along with the rotation of the earth, there is the cycle of the seasons and the length of a calendar year, which measures out Earth’s full elliptical trip around the sun. The seasons that humans experience, with the intensity of the seasons depending on where they live — Spring, Summer, Fall, and Winter— are born of changes in position relative to the sun, which in turn relates back to Earth’s tilted axis.
All of this matters to farmers because the seasons create a crop cycle: “A time to plant and a time to harvest.” The basic rhythms of the crop cycle are consistent, year in and year out, because the rotation of the Earth and its path around the sun stays the same.
Cycles literally govern the rhythm of growth, which in turn governs the rhythm of life. Imagine if a farmer tried to plant crops in the fall and harvest them in spring. Or imagine if the farmer tried to plant and harvest at random, with no heed for the seasons at all. The results would be disastrous. Crop yields, to the extent they showed up at all, would be greatly diminished (and driven by luck).
Investment cycles — which we can also think of as “market cycles” — are nowhere near as fixed and reliable as crop cycles. This is because investment cycles involve human nature and the linked cause and effect outcomes of human activity, elements which are far less steady and predictable than the Earth’s rotation and movement around the sun.
With that said, market cycles are reliable over time for the same reason: Human nature does not change, and the basic aims of human activity do not change. Science and technology are in a constant state of flux; regimes, nation states, and even empires rise and fall; and yet humans carry on doing more or less the same thing.
Market cycles are also like crop cycles in that, from an investment perspective, they create “a time to plant and a time to harvest.” There are times within a market cycle when it makes sense to be “planting” — investing aggressively and deploying savings into the market — and other times when it makes sense to be “harvesting” — cashing out gains and reducing market exposure.
The study of market cycles does not provide a crystal ball or simplistic set of instructions. The messiness of human behavior and the flow of complex events is too dynamic to predict with rigid accuracy. The idea, instead, is to be aware of crucial factors and to invest in line with odds and probabilities, increasing the odds of achieving an optimal result.
Crop cycles are further comparable with market cycles in that, for the farmer, the regularity of growth season and harvesting season, and the fixed order in which they occur, is no guarantee as to certainty of outcome.
The farmer knows, in other words, the most logical times of the year to plant and harvest. But multiple intervening factors — weather events, crop health, soil variance, rainfall, market demand, trade rules, and more — impact the farmer’s ultimate result, both in terms of what the final crop yield will be and what the market will pay.
In the face of such uncertainty, there are steps the farmer takes to both target an optimal result and protect against downside in adverse circumstances. (This is why the Chicago futures markets were originally invented: To help grain producers reduce their risk of ruin between planting and sale.)
Investors, like farmers, have comparable ways to ensure optimal results and reduce risk. Paying attention to market cycles — using cycle knowledge rotating one’s capital from one industry crop to another, sometimes purchasing the investing equivalent of crop insurance — is a way to do that.
There are many different types of market cycles, and many of them operate simultaneously. Rather than just one cycle holding sway, there are typically multiple cycles, in various stages of maturity, impacting markets at any given point in time.
For example, there is the business cycle, which alternates between periods of growth and recession; the boom-bust cycle, which traces a long pendulum arc between investor euphoria and despair; credit, debt, and interest rate cycles, relating to the rise and fall of interest rates and overall levels of public and private debt; industry cycles, which relate to expansion or contraction in a particular part of the market; and more.
In order to farm responsibly, and to maintain a viable farming operation without going bust, the farmer must manage uncertainty in the context of cycles, season after season and year after year. Being aware of cycle inputs does not remove the uncertainty the farmer faces — but it contributes greatly to wise decision making.
For investors, the picture is the same. The more we can understand about various cycle inputs — factors like where we are in a given cycle; how the odds and probabilities are shaped by a given cycle; what cycle dynamics say about which areas of the market to invest in (and which to avoid), and more — the greater our odds of investment success.
As we expand and deepen our cycles and focus, the TradeSmith contribution to you, the individual investor, will come in the form of research and tools side by side.
We plan to send more proprietary research your way on where we are in the context of market cycles, helping you to make better decisions as a result. And we plan to expand our roster of software tools to help you take advantage of that research, thus improving your self-directed results.
It’s a big and exciting topic, and we’re excited to be digging in.
TradeSmith Research Team