Given our starting point that business cycles are structurally longer, with shallower but extended downturns, it is perhaps no surprise that our late-cycle investing principles should be so “evergreen.” While each cycle is different and each stage of a cycle is different, we think these principles of thoughtful asset allocation, true diversification, risk awareness and robust governance take investors back to basics.
Part of our argument is that cyclical dynamics have become less distinct due to structural changes in the way the economy works. The other part of our argument is that a genuinely strategic approach to investing should be applicable anywhere in the cycle, and should enable one to look through the cycle.
When we write about our principles for late-cycle investing, therefore, we do so not to delineate the “right” allocations to make or even the “right” sort of portfolio to adopt. Instead, we are trying to delineate the right sort of questions to ask of your governance structures, your flexibility and your adaptability as an investor, at the point when they are likely to face their most stringent test. To put it another way, making portfolios robust against the volatility of the cycle (“surviving”) is also about maintaining the ability to pick up value opportunities that look through the cycle (“thriving”). If you are able to pursue your portfolio strategy during this period, you are more likely to be on surer ground whatever stage of the cycle we are in.