What do you think?
Rate this book
The Long Good Buy: Analysing Cycles in Markets
PRAISE FOR THE LONG GOOD BUY : "Oppenheimer offers brilliant insights, sage advice and entertaining anecdotes. Anyone wishing to understand how financial markets behave – and misbehave – should read this book now."Stephen D. King, economist and author of Grave New The End of Globalisation, the Return of History "Peter has always been one of the masters of dissecting financial markets performance into an understandable narrative, and in this book, he pulls together much of his great thinking and style from his career, and it should be useful for anyone trying to understand what drives markets, especially equities."Lord Jim O'Neill, Chair, Chatham House "A deeply insightful analysis of market cycles and their drivers that really does add to our practical understanding of what moves markets and long-term investment returns."Keith Skeoch, CEO, Standard Life Aberdeen "This book eloquently blends the author's vast experience with behavioural finance insights to document and understand financial booms and busts. The book should be basic reading for any student of finance."Elias Papaioannou, Professor of Economics, London Business School "This is an excellent book, capturing the insights of a leading market practitioner within the structured analytical framework he has developed over many years. It offers a lively and unique perspective on how markets work and where they are headed."Huw Pill, Senior Lecturer, Harvard Business School " The Long Good Buy is an excellent introduction to understanding the cycles, trends and crises in financial markets over the past 100 years. Its purpose is to help investors assess risk and the probabilities of different outcomes. It is lucidly written in a simple logical way, requires no mathematical expertise and draws on an amazing collection of historical data and research. For me it is the best and most comprehensive introduction to the subject that exists."Lord Brian Griffiths, Chairman - Centre for Enterprise, Markets and Ethics, Oxford
304 pages, ebook
Published April 9, 2020
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 12 of 12 reviews
November 9, 2021
I'd recommend this book to individuals interested in learning more about what drives equity markets over the medium- to long-term. If you ever asked yourself "What might stock valuations mean for future returns?" or "What does the low interest rate environment signal for economic growth to come?", then you will probably enjoy this book. Peter Oppenheimer has decades of experience in the field and that is clearly visible in this detailed quantitative and qualitative look at stock markets.
Why I am only giving the book 3 stars (liked it): Emerging market equities are pretty much ignored. Chapter 6 presents an indicator for bear markets. Peter explains which components are used in the indicator and why, but he doesn't show the actual methodology (are all components equally important? are they threated by using thresholds with dummy variables or are continuous values used? etc.)
Summary (added on 01 November 2021)
Riding the cycle under very different conditions
Warren Buffett: “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
An IMF study into more than 60 recessions around the world between 2008 and 2009 showed that none of them had been predicted by the consensus of professional economists.
While forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over. As IMF researcher Prakash Loungani put it, “The record of failure to predict recession s is virtually unblemished.”
Returns over the long run
Equity markets perform best when economic conditions have been weak, valuations are low, but there is an improvement in the second derivative of growth (the rate of change stops deteriorating).
Higher valuations imply either greater risk of a correction/bear market or a sustained period of low returns in the future. Valuations are a much greater predictor of medium-term returns than those in the short-term.
The equity cycle: identifying the phases
There tend to be four phases:
• The despair phase: The period when the market moves from its peak to its trough, also known as the bear market. This correction is mainly driven by falling valuations, such as P/E multiple contraction. (avg. 16m long and -43% real return)
• The hope phase: This is typically a short period (avg. 9m in the US), when the market rebounds from its trough valuation, or P/E multiple expansion. (avg. 9m long and +44% real return)
• The growth phase: This is usually the longest period, when earnings growth is generated and drives returns. (avg. 49m long and +16% real return)
• The optimism phase: This is the final part of the cycle, when investors become increasingly confident, or perhaps even complacent, and where valuations tend to rise again and outstrip earnings growth, thereby setting the stage for the next market correction. (avg. 23m long and +62% real return)
Actual profit growth and returns are surprisingly unsynchronized.
Generally, cycles in which the initial setback is driven by structural problems tend to have longer growth phases than other cycles, because it takes longer for investors to regain the confidence that makes them willing to pay more for earnings and therefore move the market into the optimism phase.
The best period for equities tends to be when the ISM is in negative territory (with reading of below 50) – usually consistent with recession or weak economic activity – but when it reaches a positive inflection point.
The best returns usually do not come when the data are strongest, but rather when they are at their weakest point and starting to inflect. This second derivative, a period of weak but improving activity, is the point at which animal spirits tend to kick in and investors buy into equity markets in anticipation of a future recovery.
Generally speaking, returns are higher if bond yields are falling, and this is the case in all phases of the industrial cycle.
Asset returns through the cycle
Equities are the poorest performer in the despair phase. In the hope phase, equities tend to offer by far the best returns.
Theoretically, when bond prices rise (and their yields, or the level of interest rates, fall), equity prices tend to rise (often buoyed by higher valuations). By contrast, rising interest rates or bond yields (and falling bond prices) tend to be negative for equities because the rate at which future cash flows can be discounted would be increasing (therefore reducing the net present value of equity cash flows).
Economies that are more prone to deflation, such as Japan and (more recently) Europe, rising interest rates and bond yields have often been seen as positive for equity investors.
When rates rise too quickly, they can weigh on growth expectations and valuations for risky assets, and rate volatility can spill over to equity volatility.
On average (excluding event driven drawdowns), EPS declines lag the start of the bear market by 5 months. Put another way, prices start to fall 5 months before EPS does (however, the range is wide).
Bear market indicator flags:
• Unemployment: The combination of cycle-low unemployment and high valuations does tend to be followed by negative returns.
• Inflation: Rising inflation has been an important feature of the environment prior to bear markets in the past, particularly before the period of “great moderation” in the 1990s.
• Yield curve: flat yield curves, prior to inversion, tend to be followed by low returns or bear markets. The often used 3m-10y spread might not work so well in the QE environment, and the 0m-6m forward spread more clearly captures the market’s near term outlook.
• Growth momentum: The highest returns are when the ISM is low but recovering, and the lowest are when it is low and deteriorating. On average, the slowdown phase, when momentum indicators are high but deteriorating, tends to be accompanied by lower returns, and so when momentum indicators are very elevated, there is a reasonable chance that they will deteriorate and eventually move below recession levels. ¨
• Valuation: Valuation is rarely the trigger for a market fall; often valuations can be high for a long period before a correction or bear market. But when other fundamental factors combine with valuation as a trigger, bear market risks are elevated.
Private sector financial balance: The financial balance is measured as total income minus total spending for all households and firms. It is a measure of financial overheating risk.
Bull’s eye: The nature and shape of bull markets
Lower and more stable interest rates will often result in stronger bull markets, with a higher component coming from valuation.
Blowing bubbles: Signs of excess
The psychology of the crowd – the belief that one might be missing out on a great opportunity and, at the same time, a sense that there is safety in numbers – is often evident in bubble markets.
Light touch regulation, or deregulation, is often an ingredient in the buildup of financial bubbles.
Many bubbles in history were fueled by a belief that “this time is different”, and this has encouraged investors to look at, and justify, new ways of valuing companies.
How the cycle has changed post the financial crisis
What makes the post-financial-crisis period so unusual is that the economic cycle has been much longer than normal, and much weaker.
It is difficult to know how much of the recovery in equity markets has been a function of loose financial conditions, zero interest rates and QE, but it is telling that the recovery in equity markets in this cycle has been much sharper than following similarly deep bear markets in the past.
One of the other unusual developments that has emerged since the financial crisis is that, despite rising employment, wages and inflation have remained very low.
Below zero: The impact of ultra-low bond yields
The falls in bond yields have become so dramatic in some cases that roughly 25% of government debt globally has a negative yield.
QE is argued to affect yields by pushing down investor expectations about future interest rates through a “signaling effect.” The central bank purchases of government securities encourages investors to increase their demand for riskier assets in order to achieve an acceptable return, thereby pushing down the yields of other debt securities.
Falls in inflation expectations, alongside weaker output since the financial crisis, have also justified lower bond yields.
The slowing rate of long-term growth in corporate earnings, a development that has been present in Japan for 20 years, is also emerging in Europe as its bond yields, like those of Japan, fall below zero.
Why I am only giving the book 3 stars (liked it): Emerging market equities are pretty much ignored. Chapter 6 presents an indicator for bear markets. Peter explains which components are used in the indicator and why, but he doesn't show the actual methodology (are all components equally important? are they threated by using thresholds with dummy variables or are continuous values used? etc.)
Summary (added on 01 November 2021)
Riding the cycle under very different conditions
Warren Buffett: “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
An IMF study into more than 60 recessions around the world between 2008 and 2009 showed that none of them had been predicted by the consensus of professional economists.
While forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over. As IMF researcher Prakash Loungani put it, “The record of failure to predict recession s is virtually unblemished.”
Returns over the long run
Equity markets perform best when economic conditions have been weak, valuations are low, but there is an improvement in the second derivative of growth (the rate of change stops deteriorating).
Higher valuations imply either greater risk of a correction/bear market or a sustained period of low returns in the future. Valuations are a much greater predictor of medium-term returns than those in the short-term.
The equity cycle: identifying the phases
There tend to be four phases:
• The despair phase: The period when the market moves from its peak to its trough, also known as the bear market. This correction is mainly driven by falling valuations, such as P/E multiple contraction. (avg. 16m long and -43% real return)
• The hope phase: This is typically a short period (avg. 9m in the US), when the market rebounds from its trough valuation, or P/E multiple expansion. (avg. 9m long and +44% real return)
• The growth phase: This is usually the longest period, when earnings growth is generated and drives returns. (avg. 49m long and +16% real return)
• The optimism phase: This is the final part of the cycle, when investors become increasingly confident, or perhaps even complacent, and where valuations tend to rise again and outstrip earnings growth, thereby setting the stage for the next market correction. (avg. 23m long and +62% real return)
Actual profit growth and returns are surprisingly unsynchronized.
Generally, cycles in which the initial setback is driven by structural problems tend to have longer growth phases than other cycles, because it takes longer for investors to regain the confidence that makes them willing to pay more for earnings and therefore move the market into the optimism phase.
The best period for equities tends to be when the ISM is in negative territory (with reading of below 50) – usually consistent with recession or weak economic activity – but when it reaches a positive inflection point.
The best returns usually do not come when the data are strongest, but rather when they are at their weakest point and starting to inflect. This second derivative, a period of weak but improving activity, is the point at which animal spirits tend to kick in and investors buy into equity markets in anticipation of a future recovery.
Generally speaking, returns are higher if bond yields are falling, and this is the case in all phases of the industrial cycle.
Asset returns through the cycle
Equities are the poorest performer in the despair phase. In the hope phase, equities tend to offer by far the best returns.
Theoretically, when bond prices rise (and their yields, or the level of interest rates, fall), equity prices tend to rise (often buoyed by higher valuations). By contrast, rising interest rates or bond yields (and falling bond prices) tend to be negative for equities because the rate at which future cash flows can be discounted would be increasing (therefore reducing the net present value of equity cash flows).
Economies that are more prone to deflation, such as Japan and (more recently) Europe, rising interest rates and bond yields have often been seen as positive for equity investors.
When rates rise too quickly, they can weigh on growth expectations and valuations for risky assets, and rate volatility can spill over to equity volatility.
On average (excluding event driven drawdowns), EPS declines lag the start of the bear market by 5 months. Put another way, prices start to fall 5 months before EPS does (however, the range is wide).
Bear market indicator flags:
• Unemployment: The combination of cycle-low unemployment and high valuations does tend to be followed by negative returns.
• Inflation: Rising inflation has been an important feature of the environment prior to bear markets in the past, particularly before the period of “great moderation” in the 1990s.
• Yield curve: flat yield curves, prior to inversion, tend to be followed by low returns or bear markets. The often used 3m-10y spread might not work so well in the QE environment, and the 0m-6m forward spread more clearly captures the market’s near term outlook.
• Growth momentum: The highest returns are when the ISM is low but recovering, and the lowest are when it is low and deteriorating. On average, the slowdown phase, when momentum indicators are high but deteriorating, tends to be accompanied by lower returns, and so when momentum indicators are very elevated, there is a reasonable chance that they will deteriorate and eventually move below recession levels. ¨
• Valuation: Valuation is rarely the trigger for a market fall; often valuations can be high for a long period before a correction or bear market. But when other fundamental factors combine with valuation as a trigger, bear market risks are elevated.
Private sector financial balance: The financial balance is measured as total income minus total spending for all households and firms. It is a measure of financial overheating risk.
Bull’s eye: The nature and shape of bull markets
Lower and more stable interest rates will often result in stronger bull markets, with a higher component coming from valuation.
Blowing bubbles: Signs of excess
The psychology of the crowd – the belief that one might be missing out on a great opportunity and, at the same time, a sense that there is safety in numbers – is often evident in bubble markets.
Light touch regulation, or deregulation, is often an ingredient in the buildup of financial bubbles.
Many bubbles in history were fueled by a belief that “this time is different”, and this has encouraged investors to look at, and justify, new ways of valuing companies.
How the cycle has changed post the financial crisis
What makes the post-financial-crisis period so unusual is that the economic cycle has been much longer than normal, and much weaker.
It is difficult to know how much of the recovery in equity markets has been a function of loose financial conditions, zero interest rates and QE, but it is telling that the recovery in equity markets in this cycle has been much sharper than following similarly deep bear markets in the past.
One of the other unusual developments that has emerged since the financial crisis is that, despite rising employment, wages and inflation have remained very low.
Below zero: The impact of ultra-low bond yields
The falls in bond yields have become so dramatic in some cases that roughly 25% of government debt globally has a negative yield.
QE is argued to affect yields by pushing down investor expectations about future interest rates through a “signaling effect.” The central bank purchases of government securities encourages investors to increase their demand for riskier assets in order to achieve an acceptable return, thereby pushing down the yields of other debt securities.
Falls in inflation expectations, alongside weaker output since the financial crisis, have also justified lower bond yields.
The slowing rate of long-term growth in corporate earnings, a development that has been present in Japan for 20 years, is also emerging in Europe as its bond yields, like those of Japan, fall below zero.
July 4, 2020
Extremely informative read. Oppenheimer starts out by defining different types of bear and bull markets and takes the reader through a brief history of such markets in the US and abroad. Similar to Howard Marks’ analysis on investment cycles, Oppenheimer tells the reader what to look for in the different types of bear and bull markets and goes on to explain the phenomenon of market bubbles.
The analysis on market bubbles was refreshing. You can draw a lot of parallels between this analysis and whats occurring in todays market (Robinhood traders and QE).
The final chapters describe the post ‘08 world. Times are changing (unforeseen interest rate lows), but not really. Oppenheimer shows us that the technology companies that currently make up a huge portion of todays market are nothing new. In fact they are undervalued compared to the mega valuations of the transportation and financial stocks of the 19 and 20th century.
I can go on and on - a lot of insightful gems here. Definitely recommended.
The analysis on market bubbles was refreshing. You can draw a lot of parallels between this analysis and whats occurring in todays market (Robinhood traders and QE).
The final chapters describe the post ‘08 world. Times are changing (unforeseen interest rate lows), but not really. Oppenheimer shows us that the technology companies that currently make up a huge portion of todays market are nothing new. In fact they are undervalued compared to the mega valuations of the transportation and financial stocks of the 19 and 20th century.
I can go on and on - a lot of insightful gems here. Definitely recommended.
May 10, 2022
Very solid read. However, with that said, a minor familiarity with asset class mix/portfolio construction, market cycles and an understanding of the correlative relationships amongst differing risk-bearing assets is required to best grasp the topics at play. Highly recommend given the current state of the market.
July 19, 2020
A great overview of the workings of financial cycles, somewhat beginner's friendly.
October 29, 2021
Decent book. Collection of Past GS Investment Research Report. Nothing spectacular or path breaking.
December 5, 2023
一本讓投資人辨別經濟週期裡牛市與熊市的工具書，因為市場短期的波動實在難以避免，於是教人要在熊市接近底部時進場，牛市到達高峰期出場，紙上操作時的確有利可圖，不過要人克服市場牛市或熊市的情緒真的很難做到，加上各種分析的不準確，所以作者從長期的經濟週期當基礎來做為分析的基礎，因為把時間拉長，投資者的報酬就越有提高的機會
1．市場的理性預測是不可靠的，所以作者以歷史循環與行為心理學來切入
2．更高的長期報酬率通常伴隨的是更高的風險波動，而且經濟有周期性，投資時間太短可能根本達不到所謂的長期報酬率
3．股票除了帳面的數字外，長期之下股息的複利是很驚人的
4．股票週期的四個階段：絕望（熊市，本益比倍數縮減，平均十六個月左右）、希望（預期經濟已在谷底，本益比擴張，這個階段很短，平均九個月左右）、成長（盈餘eps出現成長，階段最久，平均四十九個月左右）、樂觀（成長導致的自信過熱，本益比仍高，但eps開始下降，平均二十三個月左右）
5．最高報酬發生在上面的希望階段，其次是樂觀階段，成長階段平平，絕望階段則虧損
6．最高eps發生在成長階段，其次是絕望階段，希望與成長階段則平平
7．在成長階段中可能有許多小的迷你週期，用每季的gdp可能看不出來，用pmi或ism指數來觀察可能會更有效一些
8．股票表現：希望階段最好，樂觀階段次之，成長階段打平，絕望階段虧損
9．公債表現：希望階段最好，樂觀階段次之，絕望階段打平，成長階段虧損
10．商品表現：樂觀階段最好，絕望階段次之，希望階段打平，成長階段打平
11．絕望階段：應以商品為主，公債為輔
12．希望階段：應以股票為主，公債為輔
13．成長階段：應以股票為主，商品為輔
14．樂觀階段：應以股票為主，商品為輔
15．股票的價值：股票是一種對未來名目成長的索價權，並應隨通膨或經濟成長而提高，其現值應是未來盈餘或股息折現後的現值
16．股息殖利率 + 成長率 = 零風險利率 + 股票風險溢酬（ERP）
17．公債殖利率越高，等同公債價值越低，通常對股票市場不利，但在量化寬鬆下，這個情況就不一定了
18．化工業是了解經濟情況的一個好標的，因為化工產品是許多工業的原料，所以下游需求會直接影響化工業���榮枯
19．食品業則剛好相反，不論經濟好壞，市場的波動不會太大，畢竟人總是要吃飯
20．週期性產業：對經濟較為敏感，所以經濟好轉時相對表現較好，希望階段與樂觀階段較佔優勢
21．防禦性產業：對經濟較不敏感，所以經濟不好時相對表現較好，絕望階段較佔優勢
22．週期性與防禦性產業中又各有成長型與價值型兩類，成長型指的是爆發性較好，價值型為股價相對便宜的
23．成長型在樂觀階段表現較好，價值型在成長階段表現較好
24．熊市的定義：股市下跌超過20%，一般來說時長大約兩年
25．熊市的起因：利率升高/通膨升高，對衰退的恐懼；無預警的外部因素；重大的資產價格泡沫危機
26．熊市的類型：週期型（常由貨幣政策引起，平均股市下跌30%，平均時長27個月，恢復時間平均為4年，平均利率下降33%）、突發事情型（常由戰爭等外部事件造成，平均股市下跌29%，平均時長9個月，恢復時間平均為1年）、結構型（常由金融泡沫引起，平均股市下跌50%，平均時長48個月，恢復時間平均為9年，平均利率下降70%）
27．股市通常會在熊市出現後才下跌，但在恢復前就開始上漲
28．通膨上升常常是引發熊市的因子之一
29．公債殖利率上升也因緊縮的貨幣政策而常在熊市前出現
30．ism指數已在高點處時
31．金融危機之後是進場的大好時機
32．進場時選擇未來三年預期營收超過8%的成長股為最優
32．新科技會推升產業的股價，但也要留心是否新科技需置換整個產業鏈而造成股價高估
1．市場的理性預測是不可靠的，所以作者以歷史循環與行為心理學來切入
2．更高的長期報酬率通常伴隨的是更高的風險波動，而且經濟有周期性，投資時間太短可能根本達不到所謂的長期報酬率
3．股票除了帳面的數字外，長期之下股息的複利是很驚人的
4．股票週期的四個階段：絕望（熊市，本益比倍數縮減，平均十六個月左右）、希望（預期經濟已在谷底，本益比擴張，這個階段很短，平均九個月左右）、成長（盈餘eps出現成長，階段最久，平均四十九個月左右）、樂觀（成長導致的自信過熱，本益比仍高，但eps開始下降，平均二十三個月左右）
5．最高報酬發生在上面的希望階段，其次是樂觀階段，成長階段平平，絕望階段則虧損
6．最高eps發生在成長階段，其次是絕望階段，希望與成長階段則平平
7．在成長階段中可能有許多小的迷你週期，用每季的gdp可能看不出來，用pmi或ism指數來觀察可能會更有效一些
8．股票表現：希望階段最好，樂觀階段次之，成長階段打平，絕望階段虧損
9．公債表現：希望階段最好，樂觀階段次之，絕望階段打平，成長階段虧損
10．商品表現：樂觀階段最好，絕望階段次之，希望階段打平，成長階段打平
11．絕望階段：應以商品為主，公債為輔
12．希望階段：應以股票為主，公債為輔
13．成長階段：應以股票為主，商品為輔
14．樂觀階段：應以股票為主，商品為輔
15．股票的價值：股票是一種對未來名目成長的索價權，並應隨通膨或經濟成長而提高，其現值應是未來盈餘或股息折現後的現值
16．股息殖利率 + 成長率 = 零風險利率 + 股票風險溢酬（ERP）
17．公債殖利率越高，等同公債價值越低，通常對股票市場不利，但在量化寬鬆下，這個情況就不一定了
18．化工業是了解經濟情況的一個好標的，因為化工產品是許多工業的原料，所以下游需求會直接影響化工業���榮枯
19．食品業則剛好相反，不論經濟好壞，市場的波動不會太大，畢竟人總是要吃飯
20．週期性產業：對經濟較為敏感，所以經濟好轉時相對表現較好，希望階段與樂觀階段較佔優勢
21．防禦性產業：對經濟較不敏感，所以經濟不好時相對表現較好，絕望階段較佔優勢
22．週期性與防禦性產業中又各有成長型與價值型兩類，成長型指的是爆發性較好，價值型為股價相對便宜的
23．成長型在樂觀階段表現較好，價值型在成長階段表現較好
24．熊市的定義：股市下跌超過20%，一般來說時長大約兩年
25．熊市的起因：利率升高/通膨升高，對衰退的恐懼；無預警的外部因素；重大的資產價格泡沫危機
26．熊市的類型：週期型（常由貨幣政策引起，平均股市下跌30%，平均時長27個月，恢復時間平均為4年，平均利率下降33%）、突發事情型（常由戰爭等外部事件造成，平均股市下跌29%，平均時長9個月，恢復時間平均為1年）、結構型（常由金融泡沫引起，平均股市下跌50%，平均時長48個月，恢復時間平均為9年，平均利率下降70%）
27．股市通常會在熊市出現後才下跌，但在恢復前就開始上漲
28．通膨上升常常是引發熊市的因子之一
29．公債殖利率上升也因緊縮的貨幣政策而常在熊市前出現
30．ism指數已在高點處時
31．金融危機之後是進場的大好時機
32．進場時選擇未來三年預期營收超過8%的成長股為最優
32．新科技會推升產業的股價，但也要留心是否新科技需置換整個產業鏈而造成股價高估
March 25, 2023
Comprehensive yet succinct overview of drivers of historical bull/bear markets through a data driven approach combined with historical knowledge. Great dissection of the complex interplay between equity returns, inflation, and rates.
May 18, 2020
An absolutely excellent discussion of the history, structure and analysis of equity market cycles. And about as witty as such a subject allows.
January 25, 2022
A good introduction to market cycles for intermediate investors.
Want to read
October 5, 2023banq
December 19, 2021
本書提出一種能量化的架構，基於總經、做週期性的分析，輔助決策時，有點量化指標能幫忙心安一點
Displaying 1 - 12 of 12 reviews