"NOTHING RECEDES LIKE EXCESS" Warren Buffett
Fallen Angels with the most promise are stocks that Wall Street has marked down, without regard to their underlying value.
The best opportunities will sell at roughly half off. These kinds of intrinsic value discounts can provide a margin of safety during difficult times, and substantial upside rewards for those investors who find them early enough. For reference, the "Three Forces That Create Fallen Angels" are on the home page of www.gabrielwisdom.com. These guidelines help us identify selection candidates, but just as importantly we need to understand and identify the forces that can send share prices higher. And for this, it's important to be aware of the Cycles of Wall Street.
"You do have to know what time of market it is. Markets go in cycles like all the other rhythms of life"
Adam Smith, The Money Game
Edward Dewey's Foundation For The Study Of Cycles was established in the 1930's and partially funded by the U.S. Commerce Department. Over a period of 40 years studying cycles in nature and financial affairs, Dewey and his statisticians made thousands of important observations about the repetitive nature of our world. The science of prediction has advanced significantly since his time, and we now accept the popular view that all markets (stocks, bonds, commodities, and real estate) move in trends, rhythms, and cycles based on a combination of fundamental and psychological factors. Briefly stated, every cycle takes each asset class all the way around, from under-valued to over-valued, and back again. You may have heard about the 18 year real estate cycle and it's historical effects on home prices. Let's focus now on where we might make some money over the next few years...
The 9 Year Rhythm
Dewey, Harvard's Joseph Schumpeter and others found a correlation between the 4 year Presidential election cycle, the business cycle, and stock prices. Their research takes us back in time to the 19th Century. Cycle highs for the markets occurred in 1856, 1865, 1874, 1883, 1892, 1901, 1910, 1919, 1928, 1937, 1946, 1955, 1964, 1973, 1982, etc. Simply add 9 years to each successive date, and you can see the pattern. 1991, and 2000 were certainly on schedule as 9 year market peaks.
The 3 Year Opportunity Ahead
We also know that mid-decade investment manias have occurred with relative frequency during the last 100 years. Long time subscribers may know about the phenomenon as I've written extensively about it, quoting Ned Davis and other researchers. The basic concept is that every mid-decade, beginning with the year ending in 5 (1995, 2005, etc.) investors discover something they are willing to pay almost any price to be part of. From 1995 to 2000 it was technology, including the internet and telecom. What asset classes will become this decade's "must have" stocks?
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