Welcome to 4SOI!

I am Eric Lane and it is my pleasure to welcome you on my new blog page: Four Seasons of Investing (4SOI).

I started 4SOI as a personal collection of investment rules, a compendium of the knowledge and experiences accumulated over a 22 years career as sell-side securities analyst and hedge fund investor.

We are what we eat. We are what we read. Our output can only be as good as our input. As such, I owe a great debt of gratitude to the hundreds of authors that have shared their experiences and thoughts in the thousands of books and articles that have read over that period on the subject of markets and investing.

These heroes of mine helped me survive and thrive during what could be described as one of the most difficult investing periods in world market history. As a result, I felt some of the lessons learned needed to be taught.

Spending time on this blog is my way of giving back, of promoting their words of wisdom and my own practical experience and philosophical journey as an investor and markets practician.

I could have entitled this blog “The little Blog of Cyclical Investing” or „Principles of Cyclical Investing“, for effectively, it is about market cycles and how an investor can thrive by consistently adapting his or her style and portfolio according to pending cyclical changes.

I eventually settled for “Four Seasons of Investing”  to illustrate the natural beauty of the harmonic power laws at play. It also had a more poetic vibe to it, which matched the choice of the classic poetic quatrain, which I will use to describe some relatively complex and dynamic cyclical patterns, through a simple dialectical prism.

The Cricket & the Ant was my first lesson in economics and a great illustration of how nature is at work when it comes to describing human affairs. The same can be said of investing. Chaotic and rational, financial markets are driven by the rational quasi thermodynamic laws of supply and demand as well as the more irrational laws of human nature.

The Cricket & The Ant, by Jean de la Fontaine

The cricket had sung her song all summer long, but found her victuals too few, when the north wind blew.

Nowhere could she espy a single morsel of worm or fly.

Her neighbor, the ant, might, she thought, help her in her plight, and she begged her for a little grain till summer would come back again.

“By next August I’ll repay both. Interest and principal; animal’s oath.”

Now, the ant may have a fault or two. But lending is not something she will do. She asked what the cricket did in summer.

“By night and day, to any comer. I sang whenever I had the chance.”

“You sang, did you? That’s nice. Now why don’t you dance?”

Investing is a competitive game of survival. Evolution and capitalism are both processes of creative destruction, where only the fittest survive. As Darwin explained, the fittest are not the strongest nor the brightest, but those who adapt. The simple truth therefore is that in order to survive investors must continuously adapt their methods to changing market conditions and preferably before market conditions change.

If there is one lesson to be drawn from the last twenty or so years, it’s that change is the only constant. Change is in the nature of things. From the Dow Jones index to the Forbes rich list, everything changes. Only GE remains as an original Dow Jones Industrial index component created in 1882 by Charles Dow. Hundred years later, Forbes magazine launched its roll call of the richest people in America. Very few people on that original list are still on it and only 10% of the people who made the Forbes Rich list in 2000 had kept their perch 10 years later. Between 1990 and 2010, investors had to face a major shift of economic power from the West to the East, two commodity downturns and a commodity boom, 4 mega bear markets, 4 mega bubbles, etc.

Therefore fortune does not favor the bold but those who are best able to adapt their methods and asset allocation to the cyclical nature of the market. Some investment styles do work brilliantly under certain market conditions, but not in other. This is why most investors, who adopt permanently an investment philosophy or a stock selection method are condemned to failure or mediocrity. There are no bad markets, only bad investors.

Yet, too many books focus on one side of the game only, as if you had to chose your camp. Some say buy low PE stocks (buy low sell high). Some say buy high and sell higher. Some will tell you to buy the market and hold forever. Much fewer would tell you when to sell. Value investors or the so-called “fundamentalists” often scoff at technicians, as if they were part of a stupid herd. Technicians would counter-argue that value investor focus on „funnymentals“  and buy stocks nobody wants to hold.

Investing is a dynamic and "adaptative" process. The trick indeed is to know when, how and what method to use at any given time. There are no magic formulas or silver bullets. In the real world, prices are in not in equilibrium, but in a constant state of desiquilibrium following non linear patterns. Prices do not only reflect the present or the past, but try to capture the far more uncertain future. The market is therefore always wrong.  Unlike a roulette where the odds are always the same, the future changes all the time. This is this state of constant desequilibrium that acts as a fuel of stock market movements and the very reason markets exists. If the markets were always right or „efficient“, there will be no money to be made, there would be no market. Yet every day, people buy and sell stocks, every day fresh supply and demand move prices. These constant interactions between buyers and sellers, between value and price, between facts and perceptions, between investors and speculators lie at the core of price discovery mechanisms that every investors should try to understand.

If change is in the nature of things, it does not mean that change always occurs randomly. Change in the markets is guided by relatively recurrent cyclical patterns, embedded in the constance of human nature and the laws of supply and demand. This time is different, noted Templeton, are the most expensive four words in history. Although every cycle is different  („Never the same river twice“, they say), every cycle tends to follow clearly recognisable patterns, that can be analysed and therefore predicted. As Mark Twain summarised „History does not repeat itself, but it rhymes“. This is this rhythm, this cyclical harmonic that we will be describing here.

Deciphering the signs that can tell our current position in the cycle and being able to recognise patterns characterising cyclical evolution considerably increase the odds of success for investors. „What you need is a latticework of mental models in your head. And, with that system, things gradually get to fit together in a way that enhances cognition“, says Charlie Munger, for “to the man with only a hammer, every problem looks like a nail. " To whom looks at the world rationally, the world in turn presents a rational aspect. It’s a mutual relationship, so we shall not always interpret the same patterns the same way. The value of a pattern will depend on where you are in the cycle, hence the importance of historical perspective and the need to look at patterns within patterns and to look at cycles within cycles. The more patterns within patterns you are looking at, the greater the chances of knowing the real trend, knowing where you are and therefore where you’re likely heading to. The name of the game therefore must be to stay flexible, to keep an open mind, keep on questioning the consensus and be alert to changes. In that sense, we are humble enough to know that 4SOI will not provide all the answers, but we certainly hope we will be covering most of the questions.

What started as a tool box of cyclical compasses and an invitation to (re)discover some of the dialectical universal/natural power laws at work in the stock market dwelled into a more philosophical discovery into the elementary dialectical mechanics underpinning almost every historical process.

My bottom up analytical and top down portfolio management experience spans more than twenty years and was applied across every asset classes. As our readers should soon appreciate, the series of notes and articles we are about to publish should be approached like an original Investing class 2.0, the will be organised as a series of articles, covering a wide range of topics.

We will first cover the back to basics of investing. We shall keep these posts simple enough for my children to understand them but sophisticated enough for students of the markets to become fluent in Efficient Market or Information Theory. This vulgarisation exercise aims at translating the Greeks in plain English. It will discuss the key quantitative and mathematical building blocks and the intellectual framework underpinning almost any investment methodology and philosophy.

Investing does not have to be complicated. But the practice is not easy. An investor is not defined by his or her thoughts, but by his or here actions. Actions are e-motions. Many investors are doing the right things, but yet fail because they are not doing it right. It all come down to discipline, avoiding emotional pitfalls, process and execution, for without discipline you have no method. In our articles, we will look at these aspects of how to learn from one’s mistakes and what can be learned best practices, via the review of a very practical trades' diaries and "post mortem".

 The primary work of an investor is to position his or her portfolio on the receiving end of money flows. Our third salvo of articles will discuss the cyclical mechanics of money flows. These should discuss cyclical allocation and our four dimensional cyclical investment clock Framework. Here again, we will show how truly great results can be achieved by reconciling the sound principles of value investing with the profit maximising and risk management rules of momentum investors and trend followers.

Last but not least, we shall discuss other practical matters, spanning organisational aspects of investing, practical investment cases and why the worked and why they did not work, etc.

However, what our readers won’t find are stock tips or advice on where we think the market is headed. Some of our articles might refer at times to historic precedents of situations that will find their practical use in the present market conditions, but our purpose there will be to prepare rather than predict.

My commitment is to write at least a new article a week. Hopefully, these articles will be as entertaining to read and I will enjoy writing them. As this is my first blog, I would like to thank advance our readers for their feedbacks, suggestions and any advice that will help me keep on improving its content.

As I write these first pages, the MSCI World Index has enjoyed a nine year bull market, just as a new world order is being defined. Such an intense period of change is often accompanied by high volatility and weak returns for equities. This does not mean that there is no money to be made on Wall Street (there always is).  However, if the next 10 years are to be „another battle for investment survival“, I believe that more than ever investors will need to master the craft of cyclical investing. At 4SOI, we intend to lead the way.

Enjoy. 

EL