6 ideas
Cycles are driven less by the underlying secular trend than by deviations from it. Psychology and credit push things past the midpoint, and that overshoot sets up the correction. The swing therefore spends little time at the mean, because the forces that push toward the middle keep pushing past it.
Investor sentiment swings between greed and fear, optimism and depression, credulity and skepticism, and between risk tolerance and risk aversion. The most dangerous extreme is the belief that risk is gone, because it drives prices up and prospective returns down while perceived safety rises.
When lenders are optimistic, the credit window opens wide. Weak borrowers get financed on loose terms, which inflates asset prices and seeds later defaults. The losses that follow make lenders refuse even deserving borrowers, so the credit cycle turns modest economic fluctuations into booms and crises.
You can't predict when the market will turn, but you can gauge where it stands now. Observe current conditions: valuations, deal terms, how readily capital is raised, the tone of media and cocktail-party talk, and whether investors worry about losing money or about missing out. Checking these indicators against a list of hot and cold signs shows whether the market is elevated or depressed.
Knowing roughly where the cycle stands tilts the odds without telling you the timing. So the right response is to adjust your posture: be more defensive when conditions are hot and more aggressive when they are depressed. You accept that you may be early, since the favorable odds pay off over many repetitions rather than on any single call.
Real risk comes from paying too much, and people pay too much when they believe risk is low. So riskiness rises during good times as prices go up and caution fades, and it falls during bad times as prices collapse and fear dominates. That inverts the usual intuition that booms are safe and busts are dangerous.