Market cycles
What rises a lot falls, and what falls a lot rises. Understand the cycle and crashes won't scare you.
In One Sentence
Stock markets rise over the long run, but booms and crashes take turns along the way, like tracing around an eggshell again and again.
Why It Matters
Understanding the cycle isn't about selling at the very top; backtests show that doing so actually earns you less over time. Its real use is that when a crash comes, you don't panic, and you even dare to add more. Each stage becomes clear only in hindsight, and while you're in it, it always feels like "this time is different." So I don't use the cycle to guess turning points. I only remind myself: the more people despair, the more I should buy.
One Number
Since 1990, Taiwan's stock market has had six big crashes, with falls of about 29% to 80%, and so far the market has returned to a new high every time; but Japan took 34 years, and no one can guarantee that every market will be that quick (Taiwan Stock Exchange and media reports · Chapter IV).
In the Book
Chapter IV uses the egg theory and the cocktail-party theory to explain the cycle, and lists every big crash in Taiwan's market. Chapter V connects it to adding more when the market is cold and not selling when it's hot.
Go Further
- Fear and greed What drives the cycle is the crowd swinging between greed and fear.
- Bubbles When the cycle shoots to its hottest extreme, it becomes a bubble.
- André Kostolany His egg theory draws one complete cycle as a single loop around an eggshell.
- Peter Lynch His cocktail-party theory gauges how hot or cold the market is from the talk at parties.
- Buying in crashes The reward for understanding the cycle is the nerve to add more from new income in a crash.