Howard Marks puts it perfectly: “We must never forget about the inevitability of cycles. Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.”
Yet, time and again, we fall into the same trap. When markets are rising, we convince ourselves that this time is different. We create elegant theories about market efficiency and rational behavior. We tell ourselves that modern technology and sophisticated investors have somehow tamed market volatility.
In his masterful work A Short History of Financial Euphoria, J.K. Galbraith observed that “recurrent speculative insanity and the associated financial depreciation and larger devastation are, I am persuaded, inherent in the system.” Over 300 years of financial history prove him right. From the South Sea Bubble to the Great Financial Crisis, markets have followed the same persistent pattern of euphoria followed by despair.
Understanding market cycles in action
If you’ve been investing for any length of time, you’ll recognize the pattern that Galbraith so precisely documented. It always starts with something new and exciting – whether tulips in 1630s Holland, railways in the 1840s, or, perhaps, artificial intelligence today. As Galbraith noted, “Uniformly in all such events there is the thought that there is something new in the world.” This perceived novelty is critical because, as Howard Marks explains, “If something’s new, meaning there is no history, then there’s nothing to temper enthusiasm.”
Real estate often plays a prominent role in these cycles. Think about it: when banks are eager to lend, there’s always property to finance. The Florida real estate crash of 1926, the Savings and Loans Crisis of the 1980s, Japan’s asset price bubble in 1990, and the 2008 Financial Crisis – all centered around real estate speculation and leverage. As Galbraith pointedly asked, “Who could lose on what was so obviously needed?”
The cycle gains momentum through what Galbraith described: “The price of the object of speculation goes up. Securities, land, objets d’art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues.”
Walter Bagehot’s observation that “all people are most credulous when they are most happy” explains why these frenzies are so seductive. Galbraith notes, “No one wishes to believe that this is fortuitous or undeserved; all wish to think that it is the result of their own superior insight or intuition.”
The aftermath: Denial and amnesia
The most troubling thing is what happens after the crash. Galbraith observed, “What will not be discussed is the speculation itself or the aberrant optimism behind it. Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.” This collective amnesia ensures that past mistakes are destined to be repeated.
Galbraith’s framework has demonstrated its predictive power, as seen in the dot-com bubble and the Great Financial Crisis—two significant episodes of financial euphoria that occurred after his book’s publication, yet unfolded in ways that closely mirrored the market gyrations he described.
The persistence of these cycles suggests they are not anomalies but inherent to financial markets. So, how can institutions protect themselves from market gyrations and position themselves to thrive?
How to position for market cycles
- Build the right culture
Success isn’t just about picking the right assets – it’s about fostering a culture that supports disciplined decision-making and a client-centric purpose. Your investment team needs to be comfortable challenging consensus and maintaining a long-term perspective even when markets get frothy.
2. Let data, not stories, drive decisions
Stories are seductive, especially during market extremes. Instead, anchor your decisions in data and historical base rates. What typically happens to valuations after periods of extreme optimism? How have similar assets performed through previous cycles? Let these questions guide your thinking, and consider a wide array of potential future outcomes when deciding what price to pay today.
3. Align every action with long-term strategy
While market cycles create tempting opportunities, every investment decision should align with your long-term strategic framework. When others are making reactive decisions based on market fears or euphoria, your advantage comes from maintaining strategic discipline.
Keep your investment thesis front and center when evaluating opportunities. Ask yourself: Does this investment fit our long-term strategy? Are we acting on genuine value-creation potential or simply reacting to market sentiment? The best opportunities are those where market dislocations allow you to acquire high-quality assets that fit your long-term thesis at attractive valuations.
4. Build in enhanced scepticism
J.K. Galbraith argued that the only remedy to financial mania is “enhanced skepticism.” Indeed, the best investment decisions emerge from robust discussion and healthy debate. Create an environment where team members feel comfortable challenging conventional wisdom. Rotate devil’s advocate roles in investment committees. Seek out diverse viewpoints, especially when consensus is strong.
5. Be Ready for Opportunities
Market stress creates opportunity. As Howard Marks reminds us, “There are few assets so bad that they can’t be a good investment when bought cheap enough.” But to capitalize on these opportunities, you need both available capital and the conviction to deploy it when others are fearful.
History’s Lesson: Prepare now, not later
The most valuable advice I can offer you is to read more financial history. As Charles Munger said, “There is no better teacher than history in determining the future … There are answers worth billions of dollars in a $30 history book.”
Of course, A Short History of Financial Euphoria costs only $15—perhaps one of the best investments anyone can make, no matter where we are in the cycle.
It will convince you that the next market cycle will come – that’s not a prediction; it’s a certainty.
Your success won’t depend on predicting exactly when it arrives but on having the framework and discipline to navigate it effectively.
This article was originally published in The Property Chronicle 2025 Spring Issue.
