Use Cycles to Identify Investment Opportunities

Great investors pay close attention to the cycle. They may not be able to predict its timing, but know the next stage is coming. They understand that leaning against the force of time is a dangerous game. - Frederik Gieschen

There are so many different investment choices out there. I don't have time to research and do my due diligence on all of them. How do I make my research more efficient by finding areas that are ripe for longer-term investment gains?

One way to do so is to study cycles. Across all different aspects of life, there are patterns that repeat - whether it's in biology with annual crop cycles or with weather progressing from Summer through Fall, Winter, Spring and then back to Summer again. Understanding the current situation relative to the cycle provides significant insights into what comes next.

Investing also has cycles that can be a great way to prioritize areas ripe for investment gains.

Investment cycle

There are many cycles in investing. One classic pattern is how market bubbles form and then pop. The cart below provides a visual picture of that evolution. Obviously, you don't want to invest in an asset that is in the "blow off" phase as that asset is primed for a fall. Conversely, it would be great to identify assets that are in the "stealth" or "awareness" phases as you would be afforded the opportunity to get into that asset prior to a rapid appreciation.

If you want to learn more about how bubbles work, I wrote an article that provides a deep dive into the various stages of the above chart:

Another great cycle is the one visualized by Wall St. Cheat Sheet in their Psychology of a market cycle:

This chart illustrates the times in a cycle which pose the highest financial risk as well as those which provide the maximum financial opportunity. As you can see above, this cycle is correlated with the collective emotions relative to that particular asset class.

Current example of a post-bubble opportunity: Cannabis

As luck would have it, one of the fintwit accounts which I follow has recently pulled together a chart showing an industry whose investment return pattern very closely mirrors the first half of the chart above. In fact, they've overlaid the price of one of the major ETFs for that market over Wall Street Cheat Sheet's psychology of a market cycle chart. That industry is cannabis and the ETF they overlay is the MSOS ETF:

If you look at the chart inlaid within the overall chart above, you can see that MSOS had explosive growth from mid-2020 through early 2021. Since then, the price has collapsed with a trough reached in late 2023. In the last few months, the price has been within a tight range that is now starting to increase.

When that price performance is overlaid on the psychology of a market cycle, there's a pretty strong correlation with the "Optimism" through "Depression" parts of the chart. This is the kind of asset class within which I want to spend some time researching investment opportunities.

So, what's the next step?

Identifying industries which could be on the cusp of increases in valuations is just the first step in an investment process. The next step is to actually do my due diligence into which specific companies within that industry are worthwhile investments.

I am going to now start with that second step by identifying the top 5-10 companies by revenue in the industry and then doing a deep dive into their key metrics. The reason I focus on the top companies in these industries is that larger companies are more likely to provide a level of safety and are are also more likely to be the initial beneficiaries of an industry upturn.

Are there other industries worth looking into based on cycles?

Right now, I see a couple of other industries which could be on the cusp of increases in value and have either already invested in some companies or am conducting my due diligence. I've identified these opportunity industries based on where they are in another cycle focused on capital investment:

• Uranium: Industry which has had very little investment in the last decade to create new supply while demand is at a steady and slowly increasing pace
• Oil and Gas: Steadily increasing demand for energy in an industry which has seen both lower than historical investment as well as has challenges getting financing due to ESG requirements

This completes today’s post on Using Cycles to Identify Investment Opportunities. The practical steps you can start taking from today’s post are:

• Recognize that there are cycles which impact the investing world: Like all different aspects of life, there are patterns that repeat, including in the investing world. Understanding the current situation relative to the cycle provides significant insights into what comes next.
• Identify industries which are on the cusp of improvement in their returns based on the cycles you've studied: I've identified several industries that are poised for upturns based on either post-bubble cycles or the capital investment cycle.
• Conduct a deep dive into key companies within the industries you've identified: Identifying industries which are poised for an upturn is just the first step in the process. As a next step, do a deep dive into key companies within the industry. I focus on the largest and most prominent companies as those provide a level of safety and are likely to be the initial beneficiaries of an industry upturn.
• Please also note that I am not a financial advisor and I share what I do for information and educational purposes only: Do your own due diligence before you make any investment decisions.

Thank you for joining me on my journey to build financial literacy for young adults and their families. Please share any comments or questions that you have in the comments section. If you are interested in reading more of my posts, please access my author page (https://vocal.media/authors/sudhir-sahay) where you can see all the posts I’ve published. Also, if there are any topics you’re interested in my broaching in future posts, please let me know. In addition to the comments section, I can be reached at [email protected].