The Wise Investor
rates are subject to supply and demand."
Kate was still listening carefully.
"Now Kate, we need to talk about a whole new area. It is
related to markets, but this topic is special all on its own.
This topic is fundamental to our economic and financial
system, and yet it is one that receives little real
Everyone knows it is there, and yet few people think
through the real implications for their investment strategy. I
am speaking, Kate, about cycles.
Nature loves cycles.
Take the seasons, autumn follows summer, then comes
winter, then spring, then summer again. The endless cycle of
the seasons. At my age, the cycle of life becomes painfully
clear. Babies are born, grow up, have children then grow
old. Eventually they die, their children have babies, and the
whole cycle repeats itself.
Everywhere one looks in nature, one sees cycles. Money
and finance is subject to the same natural laws as the
seasons. Interest rates, unemployment, production, the price
of property and the price of shares. These things all go up
and down in regular cycles.
All markets are subject to various cycles. Take the
stories we looked at with the strawberries, the man who lost
money investing in a house, and how interest rates are
determined by the demand for borrowing money.
There are only two factors required for a system to have
regular cycles. First, there must be competing forces, such
as supply and demand. Second, there must be delayed
reactions, or inertia in the system.
Let's look back at one of our earlier stories, the story of
the strawberries. The price of strawberries was high, as
there was a strong demand and few farmers were growing
them. Since prices were high, many more farmers began to
plant strawberries in the hope of making good profits.
It took time, however, for the strawberry plants to