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Reasons for Recommendation:

This book is a compilation of Howard's previous periodic memos to investors regarding cycles. Therefore, the explanations about cycles and the relationship between cycles and investment are presented from a perspective that ordinary investors can understand, both logically and semantically. In particular, the mechanism explaining how the cycles of the economy, market fundamentals, and investors' psychological emotions influence each other is more relatable, making it easier for readers to have an experiential understanding. At the same time, the methods for dealing with cycles emphasize the importance of "timing and stock selection" (which is not the same as how ordinary investors understand timing and stock selection based on price). It also proposes long-term profit strategies such as "asset allocation" and "reasonable positioning."

Setting aside many details and subtle differences, I believe that if we invest time in analyzing and researching the three major aspects, we will gain the most:

• First, fundamentals. Fundamentals include industry fundamentals, company fundamentals, and security fundamentals. I refer to these fundamentals as "knowable," and you should strive to know more than others.

• Second, market conditions. You need to train yourself to strictly adhere to discipline, ensuring that the price you pay for purchases is reasonable and matches the aforementioned industry, company, and security fundamentals.

• Third, portfolio. You need to understand the investment environment we are currently in to determine the strategic layout of our investment portfolio that adapts to the investment environment.

There has already been much analysis regarding fundamentals and market conditions. The following factors combine to form the key elements of what we are familiar with as "security analysis" and "value investing": judging how much performance return a certain asset can generate in the future is usually measured by earnings per share or cash flow per share, and then estimating the current value of this asset based on these future performance forecasts.
What do value investors do? They strive to profit from the mismatch between "price" and "value." To succeed in this endeavor, value investors need to follow these three steps:

• Step one, assess value. Quantitatively evaluate what the intrinsic value of a certain asset is now and how it will change over time.

• Step two, assess price. Compare and analyze whether the current market price of this asset is too high or too low, using the intrinsic value of the asset and historical prices, prices of other similar assets, and the overall "theoretical fair" price of all assets as benchmarks.

• Step three, build a portfolio. These value investors use the information from the above value and price assessments to construct their investment portfolios. Most of the time, their recent goal is to hold the assets that can create the most value, which have the greatest potential for price appreciation or the best risk-reward ratio. You might say that building a portfolio and selecting assets is not complicated; it is merely about identifying the assets with the highest value and choosing those whose market prices are severely undervalued relative to their intrinsic values. Overall, this is basically correct in the long run. However, I believe that incorporating another factor into the entire process of building a portfolio will yield even greater profits: preparing the corresponding investment portfolio layout for potential events that may occur in the market over the next few years.

In my view, at a specific point in time, the most effective way to optimize the portfolio layout is to determine what kind of balance to maintain between offense and defense. I believe that the balance between offense and defense should evolve with the times to respond to the overall changes in the investment environment and the changes in the positions of many factors within that environment throughout their cycles.
The key lies in "calibration." Your investment scale, your capital allocation ratios across different opportunities, and the risks of the assets you hold—all of these should be calibrated, using a continuum from offense to defense as a benchmark... When the price of value is relatively cheap, we should actively pursue offense; when the price of value is relatively expensive, we should retreat and defend.
"History continues to repeat itself," investment memo from September 2017.

I believe that for general investors in the early stages, rather than reading difficult books on economic cycles, market cycles, monetary policy, and some specialized financial psychology, it is better to first read this simple, easy-to-understand, and highly practical book seriously, especially from the perspective of understanding the combination of economic cycles, market cycles, fundamental cycles, and psychological cycles. Even general investors can gain significant insights.

My Insights:

Investment Return = ∑ Invested Assets x Asset Return Rate. The long-term returns on investments are ultimately determined by the following three factors:

∑: The proportion of various invested assets.

The formula you provided is a calculation method for investment returns, describing the weighted sum of different asset investments and their return rates.

Specifically:

• Investment Return is the weighted return of all assets.
• Invested Assets are the investment amounts for each asset.
• Asset Return Rate is the return rate corresponding to each asset.
• ∑ represents summation, indicating that all asset returns are added together, weighted by the proportion of each asset.

Here, the formula can be written as:

[
\text{Investment Return} = \sum (\text{Invested Assets} \times \text{Asset Return Rate})
]

Where:

• Invested Assets are the investment amounts for a specific asset.
• Asset Return Rate is the annual return rate or the return rate over another time period for that asset.

If you want to express it in a weighted average form, you can typically divide the invested amount of each asset by the total assets and then multiply by the corresponding asset return rate:

[
\text{Investment Return} = \sum \left( \frac{\text{Invested Assets}}{\text{Total Assets}} \times \text{Asset Return Rate} \right)
]

Where (\frac{\text{Invested Assets}}{\text{Total Assets}}) is the proportion of each asset.

This indicates that the contribution of each asset is calculated based on its proportion in the overall investment portfolio.

The calculation formula for investment returns can be written as:

[
\text{Investment Return} = \sum (\text{Invested Assets} \times \text{Asset Return Rate})
]

Here, the symbol "∑" represents the summation of different assets, meaning you multiply the return rate of each asset category by the amount invested in that asset and then sum them up.

Example:#

Suppose you have three investment projects: stocks, bonds, and real estate, with the following invested amounts and expected return rates:

1. Stocks:

   • Invested Assets: 100,000 yuan
   • Asset Return Rate: 8%

2. Bonds:

   • Invested Assets: 50,000 yuan
   • Asset Return Rate: 4%

3. Real Estate:

   • Invested Assets: 150,000 yuan
   • Asset Return Rate: 6%

Step 1: Calculate the return for each asset:

• Stock Return = 100,000 × 8% = 8,000 yuan
• Bond Return = 50,000 × 4% = 2,000 yuan
• Real Estate Return = 150,000 × 6% = 9,000 yuan

Step 2: Sum all returns:
[
\text{Investment Return} = 8,000 + 2,000 + 9,000 = 19,000 yuan
]

So, your total investment return is 19,000 yuan.

This example illustrates how to calculate total investment returns based on different asset categories and their return rates.

Invested Assets: The underlying assets determine the return rate / risk coefficient.

Asset Return Rate: The long-term average return rate of that asset.

Simply understood from the company's perspective as the basic principle of asset allocation:

Investment Return =

(Stock Assets x Long-term Average Return Rate of Stocks) +

(Bond Assets x Long-term Average Return Rate of Bonds) +

(Cash Assets x Long-term Average Return Rate of Cash)

The proportions of various assets essentially determine the long-term average return level of the final investment.

For a deeper understanding, this can also be explained using the theoretical logic of this book.

Stock assets refer to enterprises and service units that represent social productivity, reflecting the technological development stage and replacement status of social production or services; the long-term average return rate of stocks is essentially close to the GDP growth rate of the country. Due to changes in population size and structural distribution, as well as uneven technological progress, this leads to economic development cycles, which in turn affect corporate profit cycles, thus forming larger stock price market fluctuation cycles in the stock market combined with human psychological expectation fluctuations.

The so-called "timing and stock selection," from the broader perspective of asset allocation, is about adjusting the ratio and types of stock assets within the overall assets. For example, during an economic downturn, reduce the proportion of stocks and change the stocks held to essential consumer goods production companies or public service companies that are stable and not affected by economic cycles. Conversely, when the economy begins to recover, increase the proportion of stock assets, switching holdings to high-tech growth companies that represent new technological directions.

Regarding so-called value investors, although they theoretically do not agree with "timing and stock selection" and other predictive investments, insisting on the corporate value investment philosophy and a long-term holding strategy for excellent companies, the core idea of value investing is: "Buy and hold when the price of an excellent company is significantly lower than its future intrinsic value." This can also be understood as: the reason for identifying excellent companies is that there is also a prediction of the company's operating cycle, meaning they firmly believe that the company will be in a growth cycle for at least the next 3-5 years, which is the principle of the company's operating cycle. At the same time, the buying condition of the price being significantly lower than the intrinsic value actually refers to buying when the market cycle arrives, causing the company's stock price to drop significantly below its intrinsic value. This can also be interpreted as "timing," so even those who claim not to pay attention to cycles are actually applying the principles of corporate cycles + market cycles.

Bond assets reflect the cost of social funds needed for new or additional investments, and their interest rate fluctuations are influenced by macroeconomic cycles, microeconomic policy influences, and the willingness of companies to reinvest based on future profit expectations. The credit cycle, interest rate cycle, and non-performing debt cycle directly affect the price fluctuations of debt assets, forming volatility cycles. The average long-term return rate of these assets has limited upward and downward fluctuations, often serving as a hedge against stock assets to smooth the overall investment return curve. I personally believe that understanding bond assets in the asset allocation strategy as a buffer to stabilize investor psychological emotions is a better understanding. For stock value investors, bond assets are not valuable investment objects. The reason is simple: these assets have cycles but fluctuate within a certain range and do not spiral upward, so they lack long-term investment value. (Professional investment institutions or investors focusing on junk bonds and non-performing debt investments have high professional requirements and are not discussed as value investments.)

Cash assets mainly refer to monetary assets, and their average long-term return rate is generally close to the one-year fixed interest rate. From a purely return perspective, this type of asset has no long-term value. However, from the perspective of large asset allocation investments, a mandatory cash asset ratio can smooth the overall investment return fluctuations, benefiting investors' long-term asset allocation. If viewed from a cyclical perspective, when there are no good stock or bond asset allocations, retaining cash assets is also the result of "timing and stock selection." For those who adhere to stock value investing, cash assets are only retained when the prices of excellent companies are significantly higher than their intrinsic values, meaning the cash asset return rate exceeds the stock asset return rate, indicating that the market is in a state of frenzy. This is also a reflection of the market (stock market) cycle.

Finally, I would like to try to interpret whether Teacher Tang's investment philosophy is in line with the concept of cycles.

Firstly, the selected companies all meet the three major conditions of value investing, with long-term profit growth rates above 15%, and maintain growth for at least 3-5 years, indicating that the companies are in a developmental growth cycle stage. Secondly, even for cyclical companies like Focus Media, although they are greatly affected by economic cycles, after observing two complete economic cycle cycles, Focus Media's revenue and profits have consistently shown an upward curve after each cycle, aligning with the investment in growth-stage excellent companies; this is based on the understanding of cycles (corporate profit cycles) in the "stock selection" strategy.

Buying at 50% of the reasonable value after three years means buying when the company's price is significantly lower than its intrinsic value (where intrinsic value refers to the reasonable value three years later), which can also be seen as a "timing" strategy based on market cycle awareness.

At the same time, by combining the company's operating conditions with market temperature, interest rate environment, etc., appropriately adjusting the buying strategy (starting to buy stepwise above the ideal selling point, stepwise selling above the ideal selling point) to adjust cash asset holdings can also be understood as offensive or defensive strategies and position management strategies.

The above thoughts are merely my attempt to provide a superficial understanding of whether various investment philosophies are interconnected.

The great way is simple, but it is not so easy to achieve. The path of investment remains unchanged in human nature, while the forms change.

The following part is the content of my speed reading notes. Since both the author and the translator of this book are excellent, perhaps after reading this part, you can have a basic understanding of the book.

Speed reading content:

(Originally expected to take about 30 minutes, but it actually took nearly 1 hour, mainly because I read Liu Jianwei's translator's preface quite seriously.)

Introduction (Author, Translator, Book)

Preface (Author's Preface, Translator's Preface)

Table of Contents Structure (Main Directory, Main Content of Each Chapter)

Secondly, a quick and rough summary of the book's content structure (Mainline Logic)

The translator of this book, Mr. Liu Jianwei, is a professional investor and also wrote the preface for the author's previous book "The Most Important Thing in Investing," so he is very familiar with the author's investment philosophy. As a manager of a domestic public fund, he has a profound understanding of timing, stock selection, asset allocation, and position adjustments in response to cycles, so I read Mr. Liu Jianwei's translator's preface very carefully.

Mr. Liu's summary is quite insightful. I have borrowed most of Mr. Liu's translator's preface as a summary note for my speed reading. (In fact, I think if I read the entire book, my summary would definitely not be as good as Mr. Liu's.)

Below are the speed reading notes.

1. Introduction

Author: Howard Marks, founder of Oaktree Capital, "The Most Important Thing in Investing."

Translator: Liu Jianwei (General Manager of Huatai-PineBridge Fund),

Publisher: CITIC Press, Publication Date: 2019-01-01

2. Chinese Version Author's Preface

The previous book "The Most Important Thing in Investing" and the investment memos previously written, particularly those key contents related to cycles, form the foundation of this new book about cycles.

3. Translator's Preface

Liu Jianwei has a strong connection with the author, having written the preface for "The Most Important Thing in Investing," and now translating the second book. Due to his understanding of the author and being a professional investor, the content of the translator's preface is essentially the best summary.

Since the summary is very insightful, I will quote most of it as a summary of the speed reading content.

4. Author's Preface:

Economies, enterprises, and markets, like the heavens and the earth, operate according to repeatedly recurring patterns. Some recurring patterns are generally referred to as cycles. The main reasons for the formation of economic cycles, corporate cycles, and market cycles are threefold: the first is natural occurrences, the second, more importantly, is the ups and downs of human psychology, and the third is human behavior resulting from the first two factors.

Economic cycles, corporate cycles, and market cycles have a significant impact on investors. If we pay attention to these cycles, we can get ahead and earn more returns.

To maximize the benefits from this book and excel in addressing the most important investment matter of cycles, investors must learn to identify cycles, assess cycles, understand the meaning of cycles, and act according to the direction indicated by the cycles.

To master the philosophy of long-term winning investments, one must integrate many fundamental elements, all of which are essential:

First: Analytical skills are fundamental. You need to cultivate your analytical skills, including financial, economic, and financial analysis skills. These basic analytical skills are the foundation of long-term investment success, and they are all necessary, but having only these is far from enough.

Second: Market perspective is important. Understanding how the market operates is crucial. As you accumulate investment experience, your market perspective should also be supplemented, questioned, refined, and reshaped accordingly.

Third: Read extensively and learn a lot. Through reading, continuously accept beneficial new viewpoints you discover and discard unhelpful old viewpoints, which will help you continually improve the effectiveness of your investment strategies.

Regarding reading, one important point is not to only read books related to investments; you should also read books unrelated to investments. Legendary investor Charlie Munger often says: broad reading is very beneficial; it broadens your horizons and helps you learn about the history and processes of other fields outside of investments, greatly enriching your investment toolkit and increasing many effective analysis and decision-making methods.

Fourth: Communicate more with peers. Engaging in discussions with fellow investors can greatly help you enhance your investment capabilities.

Fifth: Investment experience is invaluable. Nothing can truly replace your own personal experiences.

Every year, my views on investing change. Each cycle I experience teaches me lessons that help me better navigate the next cycle.

I believe that investing is a long-term endeavor; it is a lifelong pursuit, and we have no reason to stop, stagnate, or become complacent at any time.

4. Table of Contents

(The table of contents records a brief description of the chapter contents, allowing us to see the author's writing logic and habits.)

01 Why Study Cycles in Investing?

If we understand cycles, we can align our investments with the trends of the cycles: when the winning side is more favorable to us, we can increase our bets and invest more funds to buy assets, enhancing the aggressiveness of our portfolio; conversely, when the winning side is unfavorable to us, we can exit the market and take our money off the table, strengthening the defensive nature of our portfolio.

02 Characteristics of Cycles

Events occurring during a cycle should not merely be viewed as one event following another; they should be seen as one event triggering the next. This is crucial for analyzing the causal relationships between cyclical events.

03 Laws of Cycles

Past events are greatly influenced by randomness, and thus future events will be as well; we certainly cannot predict them with complete accuracy. This is disheartening because randomness, or what we commonly refer to as luck, makes our lives unpredictable, complicating rule-making and ensuring safety.

04 Economic Cycles

Many factors can change, leading to variations in economic growth rates each year. Even if the annual average economic growth rate aligns with the long-term trend line, the level of economic growth can differ from year to year.

05 Government Counter-Cyclical Regulation

Since cycles can swing to extremes, tools to address extreme cycles should be counter-cyclical, which people can apply according to their own cycles. Ideally, the cycle of the economic regulation tools should be exactly opposite to the trend of the economic cycle.

06 Corporate Profit Cycles

The process determining a company's profitability is complex and variable. Economic cycles significantly impact the sales of some companies, while others are less affected. This is mainly due to differences in operational leverage and financial leverage levels among companies.

07 Investor Psychology and Emotional Pendulum

Corporate cycles, financial cycles, and market cycles often overshoot during upward phases and inevitably overshoot during downward phases. This tendency for cycles to overshoot is primarily caused by excessive swings in investor psychology and emotions.

08 Risk Attitude Cycles

During bull markets, we often hear people say, "Risk? What risk? I don't see how it could go wrong; everything has been great so far. Regardless, risk is my friend; the more risk I take, the more I might earn." Later, when market conditions deteriorate, many investors completely change their tune, adopting a much simpler stance: "I don't care about making an extra penny in the market; the only thing I care about is not losing any more money."

09 Credit Cycles

Outstanding investments do not come from the quality of the assets purchased but from the high cost-performance ratio of the assets—good quality assets at low prices with high potential returns and limited risks. The phase when the credit cycle suddenly slams shut is most conducive to creating a situation where cheap goods are everywhere, more than any other factor.

10 Non-Performing Debt Cycles

In times of clarity, lending institutions and bond purchasers insist on having a sufficiently large margin of safety to ensure that borrowers can repay principal and interest even if conditions worsen. As competition intensifies, lending institutions eager to lend money will provide loans to less worthy borrowers, accepting less robust debt structures, leading to newly issued bonds lacking sufficient margins of safety.

11 Real Estate Cycles

In the matter of buying houses, the influence of widely circulated sayings is particularly pronounced. However, what people ultimately learn is that no matter how correct these sayings may seem, they cannot guarantee that your investment will not lose money, because if the cost price of your investment is too high, no reasoning will suffice.

12 Market Cycles—The Integration of Cycles

For those who do not understand investing, their investments inevitably end in tragedy, because if this process based on erroneous judgments does not reach extremes, the market will not rise to the peak of a bull market, which is also the starting point for market reversals and declines, nor will it fall to the bottom of a bear market, which is also the starting point for rebounds.

13 How to Respond to Market Cycles

The key to your investment performance does not lie in what you buy but in how high the prices you pay for those purchases are. The price you pay, i.e., the market price of the securities and their valuation level relative to their intrinsic value, depends on investor psychology and the resulting investment behavior.

14 Market Cycles and Investment Layout

Whether you can successfully layout your investment portfolio to respond to future market trends primarily depends on what you do—concentrating more forces on offense or defense; secondly, it depends on when you do it—based on your exceptional insights into the future market trends indicated by cycles.

15 Limitations of Responding to Cycles

It is entirely reasonable to want to change your investment portfolio layout based on an understanding of market cycles to enhance long-term investment performance. However, you must understand that this idea requires you to possess high-level skills, and actually achieving this idea is very difficult.

16 Success Itself Also Has Cycles

Good assets turn into bad assets, and bad assets turn into good assets; this is the cycle of life. The key to investment success is understanding cycles; everything has cycles, and thus there will inevitably be ups and downs and repeated cycles within those cycles.

17 The Future of Cycles

Human tendencies to swing to extremes will never cease. Therefore, these extremes must eventually be corrected, rather than the occurrence of cycles changing. Economies and markets never follow a straight line; they did not in the past, and they certainly will not in the future.

18 Essentials of Cycles

I have selected some paragraphs from the book and compiled them together because I believe these paragraphs are very important and can greatly help you understand cycles, the causes of cycles, and how to respond to cycles.

Five Content Summary:

The three major elements of success in life are timing, location, and harmony among people, with timing ranking first. The three major elements of success in investing are timing, stock selection, and allocation, with timing ranking first. The most important aspect of timing is cycles, and this book is the best on cycles.

The greatest feature of this book is its combination of fundamentals and psychology to discuss investment cycles. The technical analysis camp discusses market cycles by only looking at market price data, while the macro analysis camp mainly looks at macroeconomic and monetary data. Essentially, both are data-driven, from model to model, neither practical nor effective. This book opens a third path, discussing the basic trends of long cycles in the market from the perspective of economic and corporate fundamentals, and how market short cycles often deviate significantly from the basic trend from the psychological perspective. The integration of fundamentals, psychology, and market aspects is mutually causal and influences each other. This interpretation of cycles is both realistic and easy to understand and apply.

Like other good books, this one also has a clear main line. The main line can be divided into three stages: understanding cycles, analyzing cycles, and responding to cycles. These correspond to the three major parts of this book: understanding the three major laws of cycles, analyzing three types of nine cycles, and responding to cycles with three operational steps.

The content structure of this book: (Essentially quoting Mr. Liu's translator's preface)

Part One: Understanding the Three Major Laws of Cycles (Chapters 1-3)

The first major law: cycles do not follow straight lines but curves.

The second major law: they will not be identical but will be similar: history does not repeat the details of the past, but it does repeat similar processes.

The third major law: less time in the middle, more time at the extremes: thus, the market either moves to extremes or towards extremes.

Part Two: Analyzing Three Types of Nine Cycles (Chapters 4-12)

The first type of cycle, fundamental cycles: (economic cycles, government counter-cyclical regulation, corporate profit cycles)

Economic cycles:

Dependent on GDP (Gross Domestic Product) cycles, with influencing factors being the total population participating in production and production efficiency.

Government counter-cyclical regulation:

This is manifested in government counter-cyclical regulation, smoothing economic fluctuations, mainly relying on monetary policy and fiscal policy, but government officials cannot accurately predict economic cycles.

Corporate profit cycles:

Theoretically, the total output of all companies equals a country's GDP, but the fluctuations in corporate profits are two to three times greater than GDP fluctuations, or even more. The main reason is that companies use two major leverages—operational leverage and financial leverage.

The second type of cycle, psychological cycles: (psychological and emotional pendulum, risk attitude cycles)

This is the most important and exciting content in the book. Psychology and emotions, while strictly speaking, are different, are difficult to distinguish, so the author combines the two for practical application, where psychology is emotion, and emotion is psychology.

Investing is like two sides of a coin, inseparable. The front side is chasing profits, and the back side is bearing risks.

Psychological Pendulum

From the perspective of chasing profits, investors' psychology and emotions towards securities swing back and forth like a pendulum between the extremes of fear and greed. This is a brilliant metaphor that captures that which is difficult to articulate.

The emotional fluctuations in the securities market resemble the movement of a pendulum. This pendulum swings back and forth, forming an arc, with the center of the arc perfectly describing the "average" position of the pendulum. However, in reality, the pendulum spends very little time at this center point, passing through it quickly. In contrast, the pendulum spends most of its time at the extremes, with each end of the arc representing an extreme point; the pendulum is either swinging towards an extreme point or away from it. However, whenever the pendulum approaches an extreme point, the inevitable result is that it will reverse direction and swing back towards the center of the arc, sooner or later, it will definitely reverse. In fact, it is this very movement of the pendulum towards the extreme point that provides the energy for the pendulum to later reverse direction and return to the center point.

This phenomenon of swinging from one extreme to another is the most certain characteristic of the investment world; investors' psychology swings like a pendulum, often moving to extremes, either towards one extreme or the other, and investors rarely linger at the center point, seldom following the happy and pleasant middle path.

Those who have spent some time in the securities market will be surprised to find that the same securities, the same market, the same companies, and the same investors can have completely opposite psychologies and emotions, and each of their reversals is believed to be correct, only to reverse again afterward. This fickleness can be aptly described by the pendulum.

Buffett says that his lifelong investment success relies on one principle: be fearful when others are greedy and be greedy when others are fearful. In fact, when investors invest, their opponent is the market; here, "others" refers to the market. Howard Marks likens the psychological and emotional fluctuations of the market to a pendulum swinging between greed and fear. This aligns perfectly with Buffett's famous saying.

Risk Attitude Cycles

_From the other side of investing, bearing risks, investors' attitudes towards risks also experience cyclical ups and downs, swinging from excessive risk aversion to excessive risk tolerance. The author first clarifies that the correct definition of risk is the possibility of loss, not the volatility defined academically, and dispels a widely circulated misconception: high risk leads to high returns. From the perspective of risk as the possibility of loss, low risk can yield high returns because the lower the possibility of loss, the greater the possibility of profit. The author points out that investors often view returns and risks as a point rather than a range of possibilities.

The third type of cycle, market cycles (credit cycles, non-performing debt cycles, real estate cycles)

The market cycles in this book generally refer to the stock market. However, in a broader sense, the credit market, non-performing debt market, and real estate market also belong to the market category, so for convenience, I will categorize them all under market cycles.

Credit Cycles

Compared to other cycles, credit cycles have a particularly large impact, but there are far fewer books discussing credit cycles, making it a significant highlight of this book.

In good economic conditions, even the worst companies can borrow money; in poor economic conditions, even the best companies find it difficult to borrow money. The author uses the metaphor of a window to vividly illustrate this, going from wide open to suddenly closed, representing a drastic change, and the speed of this change is remarkable. Lending institutions apply this to corporate loans as well as personal housing loans. Please note that the issuance of credit is managed by people, and so is bond investment.

The credit cycle is particularly sensitive to economic cycles, has a significant impact on corporate profit cycles, and greatly influences the economy and the market. The subprime mortgage crisis was essentially a crisis caused by the credit cycle reaching extremes, which in turn triggered the global financial crisis.

Non-Performing Debt Cycles

Non-performing debt investments refer to the defaulted loans and bonds of bankrupt companies, which Chinese banks refer to as non-performing assets.

Real Estate Cycles

This is the root cause of the U.S. subprime mortgage crisis and the cycle that most concerns the Chinese.

Real estate cycles have three major characteristics:

The first major characteristic: it is physical; the time from conception to delivery of the product can take several years, leading to significant fluctuations in the long real estate cycle, thus greatly impacting the profitability of real estate investments.

The second major characteristic: developers see the trees but not the forest, only focusing on themselves without considering that many peers may have the same thoughts, resulting in a "herd mentality," where the market is either overheated or too cold.

_The third characteristic: investors blindly believe that stock prices and housing prices will always rise, but the author uses the example of the Amsterdam gentleman's canal area, where prices only doubled after 350 years, to illustrate that one should not believe in legends; they are not facts.

Stock Market Cycles

Stock market cycles have three characteristics:

The first characteristic, from a multi-layered composition perspective, is that stock market cycles encompass all other cycles, plus the influence of randomness, forming the volatility cycle of the stock market. Moreover, stock market cycles are influenced by other cycles and also influence other cycles. In simple terms, fundamentals combined with psychology determine the market aspect, which in turn affects the fundamentals and psychology.

The second characteristic, regarding the amplitude of fluctuations, is that prices can deviate significantly because investors are not rational economic agents; their psychology and emotions fluctuate greatly, causing the buying and selling prices of assets to deviate significantly from their value. This presents both investment opportunities and risks.

The third characteristic, in terms of process, is that both bull and bear markets have three stages. The three stages of a bull market are: a few people see improvement in fundamentals, leading to a slight rise in the stock market; some people see improvement in fundamentals, leading to a moderate rise in the stock market; everyone sees improvement in fundamentals, leading to a significant rise in the stock market. Conversely, the same applies to the three stages of a bear market. In Buffett's words, the smartest investors act first, while the fools act last.

Part Three: Three Steps to Respond to Cycles (Chapters 13-16)

Responding to cycles involves three steps: awareness, courage, and preparation.

In summary, responding to cycles involves three steps: awareness, courage, and preparation. Chinese people often say that courage and awareness go hand in hand. In fact, awareness comes first, followed by courage; having courage and awareness is still not enough; one must also be prepared for contingencies.

Awareness—what position is the market currently in within the cycle? Understanding the present is crucial for grasping the future. The author's method is to take the market's temperature, using key indicators to measure the market's valuation level and whether market sentiment is overheated or too cold.

Courage—be fearful when others are greedy and be greedy when others are fearful; this is also Buffett's secret to investment success.

Preparation—be ready for mistakes in three areas. The first is your own mistakes; everyone makes mistakes. The second comes from unexpected events outside the market, such as storms, floods, earthquakes, tsunamis, nuclear leaks in Japan, Brexit, and the China-U.S. trade war. The third is errors inherent to the market itself; the market can maintain its errors for longer than you can avoid a margin call! The biggest secret to investing is to survive; it is not about being the winner but about being the last one standing.

To achieve long-term investment success, the key is to maintain a balanced investment portfolio layout.

The author suggests that successful investing requires maintaining an appropriate balance across three pairs of key factors:

Cycle positioning and asset selection (timing and stock selection)

Aggressive and conservative (offense and defense)

Skills and luck

These three pairs of factors are like the left hand and right hand, left leg and right leg, left brain and right brain; none can be omitted, and they must maintain an appropriate balance. However, it is essential to lean towards the correct side at the right time to maintain true balance.

This book discusses cycles, yet investors diligently study cycles in pursuit of investment success without realizing that investment success itself also has cycles. Failure is the mother of success, and success is also the mother of failure.

In fact, this book can be summarized in one sentence: cycles are always present.

We often fail in investments because we think "this time is different," only to later realize that this time is the same; cycles are always present. In investing, you may not believe anything, but you must believe in cycles. As long as there are people, there are cycles. Just as Mark Twain said: history does not repeat details, but processes do repeat similarly.