All investments are subject to change and to cycles. The two are related. Change is change, but a cycle is a bigger change.
When you are trying to make an investment decision, it is hard to distinguish between a small change and a major cycle--but to be successful, you must do so. A major cycle will influence your investments profoundly-- for a long time. A small change affects the progress of your investments hardly at all.
How do you distinguish between a small change and a major cycle? The best way to do so is to look at historical trends.
Small trends are typically symptoms of some small underlying change. Large trends, on the other hand, are years in the making and represent a very large change.
Which do you choose? The small trend or the large trend? Always bet on the large trend. The large trend is actually a major cycle playing out. Let the momentum of the large trend carry you and make you successful.
Don't bet on small trends. Small trends are deceptive. They will often superimpose themselves on a large trend for short periods of time--but it's only a matter of time before the trend goes into reversal. Why? Because the large trend will almost inevitably reassert itself again. A small trend is a small jag on the chart of a large trend. Don't believe it.
Sometimes small trends are the the start of a new large trend. This is the exception. In general, small trends are just that-- small trends.
A change in direction of a large trend represents a sea of change. A sea of change is so rare that it is not worth betting on. Don't ever bet that a small trend represents a sea of change. Instead, wait and see.
By their very nature, large trends change direction very seldom. The laws of mathematical probability require you to never bet against a large trend in favor of a small trend. If you do, the momentum of the large trend may crush you.
If you must choose, choose the large trend. Better yet, find yourself a situation where the large trend and the small trend are both moving in the same direction. This is how you go with the cycle rather than against it.
Put your knowledge of trends into practice by only investing in investment instruments that have long histories.
If you have the chance to invest in a company that has many years of sales and profit growth, then do so. As long as the basic premise remains intact, you will do well. Remember! A long history of sales and profit growth is itself a trend.
How long should that history be? At least 5 years. Ideally, it will be 12 years or more.
A long history is important because long-term trends rarely reverse direction. If they did, they would not be long term trends.
Go with the trend rather than against it. To fight a trend is to fight history.
If you must go against a major trend, do so only under the most rare of circumstances and only out of absolute necessity. Only go against a major trend when there is overwhelming evidence for doing so.
Your worst illusion is your belief that you are smart enough to know exactly when a new major trend is about to start. Don't. Please, don't.
You must never bet your entire fortune on the reversal of a major trend.
©Edward Abbott 2003