No Straight Lines


Nature’s most prevalent theme might by “cycles.” From breathing to day/night to the seasons of the year to seventeen year cicadas, cycles rule the universe.

At some level, we know from our own life experience that the economy and markets also move in cycles. Yet our human nature encourages us to focus on the present and the immediate past when we try to picture what tomorrow may bring. It seems that most people can’t see the turning point, even when we know it is inevitable.

The green arrow in our drawing could be many things. Let’s say the beginning of the green line at the low point is gasoline in 2002, $1.50 per gallon, rising in nearly a straight line to $4 by 2008. We all remember the first time gas hit $4—everywhere you turned, an “expert” was talking about gas going up to $7. Many thought we would never see $3 per gallon again, ever. All of this wrong-headed thinking was based on the straight line trend. The human mind is creative: it can invent a plausible story to justify anything—so the experts had a story to explain why gas was going to $7.

Stepping back to look at the bigger picture and the longer term, one sees that the apparent straight line was simply a small piece of a longer term cycle. We know why the turning points happen, and we explained that here.

The downward red line could be many things, too—the price of copper or iron ore from 2011 to 2016, the stock market 2007-2009, interest rates over the last couple decades. The same principle applies: ultimately, there are no straight lines, only cycles.

Sometimes we invest because we believe a turning point is coming based on a cycle we’ve studied. The challenge is that the straight line part of the deal may persist longer than we thought it would, meaning that our investment in the turning point has less value (usually temporarily.) But our fundamental understanding of cycles is what keeps us going. Often the straight line takes prices to more extreme levels, and new opportunities emerge. Our job is to do the best we can to take maximum advantage of the tuning point, when it comes.

With perspective, background, context and history playing such a major role in our work, it continues to amaze me that a history degree is of such great value in the work of investing. It is a good thing, too, since my art skills are not great (as you can see.) The moral of the story for you is to think hard when somebody proposes that “based on current trends” something must happen or will never happen. The trend is probably part of a straight line that is, itself, part of a longer cycle.

If you have questions about how this applies to current events or portfolio holdings or your specific situation, please call or write.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.