The Hindu Business Line : Study business cycle to analyse market trends

Technical analysts and the followers of the `fundamental' school rarely see eye to eye. Yet both the groups bank on the cycle theory, say Deborah Owen and Robin Griffiths in Mapping the Markets from Viva (www.vivagroupindia.com). The book explains how the cycle theory links the two disciplines — fundamental and technical analyses — and also `how cycle theory can be used to navigate successfully through the changing global economic landscape'.

The authors say that business cycle is "at the heart of analysing market trends." Because, economies do not grow in a steady, linear direction; "there are periods of expansion and contraction which tend to occur at regular intervals." To stock market investors, their advice is to focus on "readily identifiable long-term `themes' that are likely to affect economic growth and which are known as secular trends."

Such trends usually last for a generation or longer, explain Owen and Griffiths. Apart from lifestyle-changing innovations like telephone and car, which can boost long-term growth, "demographic trends are another secular factor that can have a powerful impact on the compound rate of growth of a country."

Though the stock market does not move exactly in step with the economy, there is a simple link between the two, say the authors. "The most consistent long-term driver of stock values is corporate earnings and the main determinant of these earnings is the business cycle."

Rather than lock step with the economy, the stock market "tends to look ahead and discount underlying changes in the economy so shares usually rise ahead of recovery and fall before a recession. The market leads the economy by approximately six months, but the lead time can vary considerably."

An important ingredient of the markets is the herd mentality, with crowds of people subject to mood swings. Market sentiment can be too optimistic or pessimistic, the authors caution. "Sometimes the market discounts economic events that do not happen. As Paul Samuelson, a Nobel Prize-winning economist famously remarked, `The stock market has predicted nine out of the last five recessions.'"

In a section on Elliott wave, one reads about how markets ratchet up or down in "a series of two steps forward, one step back moves or, during downtrends, one step forward, two steps back." The wave gets its name from Ralph Nelson Elliott who studied stockmarket data in the 1930s and found the ratcheting process to be in the form of a series of waves.

"There are some people today who attempt to fit every market move into an Elliott wave pattern and, with the benefit of hindsight, usually succeed," note the authors. "In practice, at its most detailed level, Elliott's work is not easy to apply to day-to-day decision-making, although the preliminary and secondary waves can be helpful in giving shape to the big picture."

A book for top-level view of markets.

Think `business family', not `family business'

Family-owned firms have not only to manage business cycles but also life cycles of humans. "Because family members are intimately involved as employees and owners, their life cycles also have an impact on the business," write Randel S. Carlock and John L. Ward in Strategic Planning for the Family Business (www.bookland.co.in).

"Human life cycle events follow a life pattern that evolves over an average of 70-80 years. Industry and even organisational life cycles are much less predictable." Over the years, business families have become smarter; they create `an open culture that involves as many family and non-family members as possible in the shaping and focus of the business.' In the place of the single owner-manager, we now have `men and women from multiple generations of the extended family who benefit by working well as a team'.

The authors assure that if planned and executed well, "the family business can become a dream job... We now see a younger generation that has a stronger interest in the family business because it is something that is uniquely theirs to build." They introduce the concept of PPP (parallel planning process) as "a new way to gather the personal, financial and strategic priorities of both family and business and combine them into a single planning strategy for the family business."

Think `business family', not `family business', exhort Carlock and Ward; `an important change in thinking' to benefit from `a new era of opportunity for human creativity' in the current century. They are positive that the best practices of flourishing family firms can serve as "a model for the entire business community. All organisations can learn from successful families that develop plans based on core values, shared visions, fair process, long-term thinking, a commitment to stakeholders and stewardship."

A family read.

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