Investment Fashion Cycles
Investment styles move in and out of favor like clothing hemlines. Howard Marks uses this image to show that popularity itself changes future returns. The question is not whether an asset class or strategy has merit, but whether its merit has already been discovered, celebrated, overbought, and priced in.
Cycle Pattern
- An undervalued style or asset is discovered.
- Early investors earn strong returns.
- Performance attracts capital and imitators.
- Cheap becomes fair, then expensive.
- The story becomes socially obvious.
- The last marginal buyer arrives.
- Overvaluation is exposed.
- Former believers flee, creating the next bargain.
Marks' old line fits perfectly here: what the wise person does in the beginning, the fool does in the end.
Why This Matters
Rear-view-mirror allocation is one of the most common investment mistakes. Investors buy what recently worked and abandon what recently disappointed, which means they often buy what has already become fashionable and expensive.
The right question is comparative and forward-looking: what return is implied by today's price, today's popularity, and today's risk premium?