Our world undergoes cyclical changes, primarily because of human involvement. Mechanical things can develop linearly, and time can move forward continuously, allowing machines with sufficient momentum to progress constantly. However, for fields like history and economics to advance, they rely on humanity. When humans are involved, change and cyclical shifts occur. I believe the main reason is that ordinary people possess emotions—they are volatile, neither steadfast nor objective.
- Rule One: Most things follow cycles.
- Rule Two: The greatest opportunities for profit and loss arise precisely when others forget Rule One.
When ordinary people feel that things are progressing well and are optimistic about the future, their behavior is heavily influenced. They spend more and save less. They borrow money to enjoy life or to boost potential profits, even if this makes their financial situation less stable (of course, when optimistic, investors forget the concept of “instability”). Furthermore, they are willing to pay more for current value or for a portion of the future.
Periodically, when upward and downward trends have persisted for a long time, and have reached an extreme (or extremes), people begin to say, “This time is different.” They cite changes in geopolitics, institutions, technology, or behavior, believing that the “old rules” are no longer valid. They extrapolate recent trends to make investment decisions. However, the results often show that the old rules remain valid, and the cycle restarts. Ultimately, trees do not pierce the sky straight up, and few things have their value drop to zero; most phenomena undergo cyclical changes.
Our conclusion is that for the majority of the time, the future looks very similar to the past, featuring both upward cycles and downward cycles. The best time to say things will improve is when the market is declining, and everyone is eager to sell things at extremely cheap prices. Conversely, when the market reaches a new high level and people propose positive rationalizations that have never been proven before, that is when danger lies. This has happened in the past, and it will happen again in the future.