Don’t be fooled by the title, I’m terribly bad at market timing, but it is tremendously necessary for these moments of euphoria in the markets to remember that everything is cyclical and it is necessary to invest time and energy in understanding the psychology of the market, even if only to protect themselves.

To be able to read the market temperature it is absolutely necessary to put yourself in a long-term perspective. One of the indicators that I find most useful in order to see the market cycle moment is the S&P500 Inflation Adjusted. This index captures the incorporation of inflation data into historical total returns and relative prices produce the following inflation-adjusted graph.

It does not take a guru to know that the market is overvalued and that, although it is not possible to know when, it seems almost certain that sooner or later this bubble, in which day in and day out the market also rises, will burst. On the other hand, the graph only shows those ‘black days’, what it does not show is the time of recession that has always been preceded by the peaks of this graph, for example, the late 1930s, early 1970s, early 2000s, among others. In this way, extrapolating the two famous rules of Warren Buffett, I propose two simple investment rules that will make you earn, or at least not lose, a lot of money:

Rule #1: Most things behave cyclically.
Rule #2: The best investment opportunities come when others forget rule number one.

When it seems that money is given away and accessing a loan is very simple, it is just when the worst loans are granted. Only a minimal fluctuation in the economy is necessary to produce a substantial change in the availability of credit, which produces a great impact on the price of assets that ends up affecting the economy itself. Acting as a ‘Snowball’ effect in reverse.

As I propose in several articles, it is absolutely necessary to be prepared for any kind of unexpected event, since it is right at this time when the protection against tail risks is the cheapest. This does not mean that we should sell all of our long exposure to the market, far from it, but we should buy cheap ‘insurance’ that will give us liquidity when the rest of the market needs it.

“There is a time when you have to bet because the future will be better and this must be when the market is down and everyone is selling everything at a bargain price” — Howard Marks

Our purpose is to convey to the individual investor, through our newsletter, simple strategies to have a covered, uncorrelated and asymmetric portfolio as possible so that any investor can implement this strategy for himself. One of the main strengths of this strategy is to be able to sleep peacefully each and every night and for this, we have between 40–60% of the portfolio invested in fixed income (other currencies, bonds, gold …) and the rest is invested in options or ETFs that make us benefit from any market situation

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.