The business cycle is a very interesting concept as it relates to investing. Nearly all businesses experience some sort of cycle with a bottom, top and everything in between. The stock market also has a cycle. Anyone with a pulse who has observed markets long enough should agree that if you invest at or near the bottom of the business cycle, the ride up is going to be tremendous. Let's examine some simple history.
Beginning in the late 1960s, after years of gains, the market reached the top of the cycle and began heading down for around five years. In 1973-74, the cycle was near rock bottom. Buying stocks then was a very rewarding move.
Heading into 1999 and 2000, Internet stocks were red hot and had been for years. The cycle was reaching its peak. Buying technology stocks then turned out to be a painful move.
You can look at all types of cycles with stock markets or specific industries and a similar pattern emerges. Investing around the end of a cyclical downturn is almost always a winning move, while investing during cyclical peaks is usually expensive.
Investing in cycles is a very easy concept to understand, but very hard to do. For one, doing so means an investor has to have the fortitude to invest when the environment is very pessimistic, and very few can actually do that. Secondly, cycles can't be timed so a degree of patience is required, sometimes a lot of it.
For the past several years, the darling tech stocks have been tortured by value investors, including yours truly. The message was stay away from Amazon (AMZN) , Facebook (FB) , Netflix (NFLX) , and all the other darlings trading for 200x or 300x earnings. Yet each year, they seemingly climb higher and higher. But performance does not necessarily mean one is right or wrong. Paraphrasing John Maynard Keynes, cycles can stay irrational longer than one can stay solvent. (Facebook is part of TheStreet's Action Alerts PLUS portfolio. Amazon is part of the Growth Seeker portfolio.)
Yet there is a lot of value in looking at cyclically battered businesses. Energy is certainly one of them and market observers have seen the impressive returns of energy companies this year as oil prices nudged higher. The fertilizer industry has been in a cyclical depression for some time. That area is worth a closer look.
There is one very important caveat, however. Down cycles can also be a sign that an industry is evolving, or worse, fading out. Technology has been a huge catalyst in this cleansing, having eliminated or destroyed industries such as photography, movie rentals and retailing. Coal is certainly another industry that has been stuck in a down cycle for years and is not likely to ever really come back to its glory days. So there is certainly a "buyer beware" warning on cyclical investing.
That being said, investing remains a game of buying low and selling high. Investing during cyclical troughs is a very intelligent way to do just that.