Why 'Boring' is a Competitive Advantage

Markets move in cycles. Understanding the structure of these cycles does not allow you to predict them, but it does allow you to remain disciplined through them.

The Four Phases

Market cycles typically move through four identifiable phases:

1. Recovery (Early Expansion)

Following a downturn, sentiment is negative but conditions are improving. Prices are low. Fear dominates. Those who buy here feel uncomfortable. This is when long-term value is usually created.

• Valuations: Low
• Sentiment: Pessimistic
• Behaviour: Most investors wait for confirmation

2. Expansion (Mid-Cycle)

Growth becomes visible. Sentiment improves. Investors who waited for safety now enter. Prices rise steadily. This phase can last years. It feels safe, and often is — until it isn't.

• Valuations: Fair to elevated
• Sentiment: Optimistic
• Behaviour: Confidence builds, caution fades

3. Peak (Late Expansion)

Optimism turns to euphoria. Prices are high, but rising. Risk is dismissed. Participation is widespread. Leverage increases. This is when fortunes are made on paper — and when the seeds of the next downturn are planted.

• Valuations: High
• Sentiment: Euphoric
• Behaviour: Everyone is an expert, caution is mocked

4. Contraction (Downturn)

Reality reasserts itself. Prices fall. Leverage unwinds. Confidence collapses. Those who bought at peaks now sell at bottoms. This is when long-term investors add exposure, while most investors reduce it.

• Valuations: Falling toward fair or low
• Sentiment: Fear to panic
• Behaviour: Forced selling, capitulation

Why Cycles Repeat

Cycles repeat because human behaviour does not change. Greed and fear are constants. When prices rise, people believe they will rise forever. When prices fall, people believe they will fall forever. Neither is true.

The cycle exists because investors consistently:

1. Extrapolate recent trends indefinitely
2. Confuse price momentum with safety
3. Underestimate tail risks during booms
4. Overestimate tail risks during busts

What You Cannot Do

You cannot time cycles precisely. You cannot know when a phase will end. You cannot predict the trigger for the next downturn, nor the catalyst for the next recovery.

What You Can Do

You can:

• Recognise which phase you are likely in
• Adjust your behaviour to the probabilities
• Avoid extreme positions based on recent trends
• Maintain discipline when others abandon it

Practical Implications

Understanding cycles does not mean trading around them. It means:

1. Being more cautious when everyone is confident
2. Being more willing to buy when everyone is fearful
3. Maintaining diversification across cycle phases
4. Avoiding leverage that cannot survive a full cycle

Conclusion

Cycles are inevitable. They cannot be avoided. But they can be prepared for. The investors who understand this remain disciplined through expansions and maintain capital through contractions.

That is the edge.

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