The Cycle of Bust and Boom Your Friend or Foe?

Do you remember how sky rocketing onion prices becomes the buzzing news in the media. Prices going up is the news going down is not the news. As media focuses on negative things more. 

onion1

and they fall so badly sometimes that farmers cry

onion2

Why this happens ?

It is all about demand and supply. When supply is more than demand price goes down and when demand is more than supply the price goes up.

Why over supply and under supply happens ?

When the onion prices goes up farmers makes more money. This more money makes them to continue growing onion, other farmers gets inspired and they also grown onions. The result next year is that there is over supply of onions, more than the demand and it drags the prices down.  Which makes the farmers suffer heavy loss and they reduce growing onions. Which create low supply and drags the prices up in coming year. Its all cyclic things

More earnings encourages more investments less earnings discourages investments.

The same happens with commodities.

The crude oil prices are at seven years low. Oil companies and countries are reducing their investments in oil assets, they are reducing their investments in oil exploration as they are not making much profit now.

oil1

oil2

In future this is going to create reduction in supply and we will see oil prices going up again. When this happens spending on oil exploration will increase again like it was happening during 2008-10

oil3

So you now understand how higher price drives more spending which leads to over supply which lead to lower price and lower spending

Higher_Price

The similar thing happens with economy. There is reccession period and there is expansion period.  Which gets reflected in the stock market. We see periods where stock prices goes up and we see periods when stock prices goes down.

stock market bust and boom

How to use this cycle in your favor 

From the above two examples you would have understood higher price leads to more spending and over supply. The time when prices are going too high is not the time to invest. That is infact the time to exit. The best time to invest is when the prices are depressed. Thats why Warren Buffett says

warren-buffet

Can you predict the top and bottom of cycle ?

The answer is big NO. There are great economists in the world with doctrates and nobal prizes. Hardly any one has ever successfuly predicted the bottom of recession or top of expansion. You too should also not try to do this prection, because you are going to fail. Start buying on major declines and start selling on major surges and wait patiently. Thats it

peter-lynch-recession

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