By: Rob Wertheimer
2020 was the third major downcycle we’ve seen in 15 years of covering this space, and while we’ve done some things better over time, there are still lessons we had to learn again over the past few years. The principles of cyclical investing are fairly simple and seem to be getting more ingrained in investor playbooks over time, making the importance of cycle timing more pronounced than perhaps it should be. 1) Buy aggressively 3-6 months ahead of estimate bottoms, sell as estimate momentum fades…cheap valuation isn’t enough to satisfy investors as peak nears. 2) Quality as a bias works well generally but does poorly off trough. 3) Once trough is past, it is worth riding the wave of upgrades for a year or two before momentum slows, and concerns about peak earnings start to rise. There is a risk to paying too much attention to recent history though: the previous two decades have different lessons about how long to hold cyclicals. Focusing too much on the 2010s could mean missing a major shift as investment and inflation come back