09/15 Howard Marks: Cycle (29) Ch.16 The Cycle in Success

XVI
THE CYCLE IN SUCCESS
The important lesson is that—especially in an interconnected, informed world—everything that produces unusual profitability will attract incremental capital until it becomes overcrowded and fully institutionalized, at which point its prospective risk-adjusted return will move toward the mean (or worse).
And, correspondingly, things that perform poorly for a while eventually will become so cheap—due to their relative depreciation and the lack of investor interest—that they’ll be primed to outperform. Cycles like these hold the key to success in investing, not trees that everyone is assuming will grow to the sky.
Hopefully you’re now equipped for the task of recognizing, assessing and responding to cycles. That can contribute substantially to your investment success. But as Peter Bernstein said, even the best investors won’t be successful all the time. Understanding that is an important part of being able to live with the effort. Success, like the other things mentioned in this book, comes and goes.
In fact, over the course of my career, I’ve detected a cycle in success. To a large degree, the ebb and flow of success—like the other cycles I’ve described—stems from the role played by human nature. And, once again, each development in the cycle leads to the next. I’ve long held the conviction I mentioned back on page 34—and it’s been strongly reinforced over my 29 years of involvement with distressed debt and distressed companies—that “success carries within itself the seeds of failure, and failure the seeds of success.”
Peter Kaufman, Charlie Munger’s biographer and the CEO of Glenair, an exceptional producer of aerospace components, describes the workings of dialectical materialism as follows: “As any system grows toward its maximum or peak efficiency, it will develop the very internal contradictions and weaknesses that bring about its eventual decay and demise” (his essay #49: “The Perpetual See-Saw,” 2010). This captures the process that guarantees that success will prove cyclical.