Cyclical Opportunities in the Stock Market

Stocks and equity indices that receive the most attention in the media are showing increasingly lower returns when measured against the actual revenues or profits of the underlying companies. This discrepancy led me to start looking elsewhere – toward opportunities that are talked about far less.

Over time, I have been paying more and more attention to sectors that follow a certain internal logic and exhibit relatively recurring cycles. Cycles that are visible both in market behaviour and in the development of accounting data. In some cyclical sectors, stock prices can fall all the way down to book value, or very close to it. At such moments, the balance between risk and potential return begins to change for me. Not because I expect a quick rebound, but because at these levels further declines often become less likely. What tends to be more probable is either a prolonged period of stagnation or a turning of the cycle. To be clear: I am referring here to the book value of companies across an entire sector. I am interested in the sector as a whole, not in individual companies, as company-specific outcomes are usually far less predictable.

I therefore focus on the sector as a whole and its recurring cycles. Time plays a crucial role in this approach. Waiting for a cycle to turn, watching prices move sideways for months or even years, is ultimately a matter of discipline and patience. On the surface, nothing particularly interesting seems to be happening, and that is precisely what many people find most difficult. Paradoxically, however, this phase is psychologically easier for me than constantly moving from one “growth opportunity” to another.

Before I began to observe these types of situations more systematically, I tended to diversify more broadly across different growth sectors. Today, when I see a logically cyclical opportunity and prices are hovering around book value, I am more inclined to concentrate a larger portion of my portfolio.

If you have any thoughts, questions, or feedback, feel free to drop me a message at mail@richardgolian.com.