Understanding Markets. Thread.
Markets/Indices move up over time BUT in a cyclical manner.
The move up is driven by inflation and productivity gains typically led by technological advances.
The cyclicality is driven by human emotions which takes a good thing to an excess before driving it down to the other extreme.
Most stocks are nothing but vehicles to play these market cycles.
In different cycles different stocks will be used as vehicles to drive up the markets/indices. This explains the sector specifics booms that we see. Eg. IT in 2000, infra in 2008 etc These vehicles out-perform massively and then when the cycle turns these are the best shorts.
Majority stocks however just play the market cycle from down to up and back up and so on - while their own intrinsic value doesn't change much at all across cycles.
However there are certain stocks - which are small in % - that perform across market cycles as they have built competitive positions that allow them to survive the downturns and thrive. Their intrinsic value (earnings power) keeps increasing led by survival and adaptation.
These stocks tend to be the enduring wealth creators and compounding machines.
Hence stocks can be categorised into three parts: those that just play the market cycle up and down, those that are the flavour of the current cycle and finally those that endure across multiple cycles.
This categorisation can allow investors to take much better decisions at different points in the cycle.
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