Experience has convinced me that there are three phases to the economic cycle:
Phase I – A period when it seems that everything you do succeeds
Phase II – A period when it seems that nothing you do succeeds
Phase III – A period when success depends on what you do
If you’ve studied the Roaring Twenties, Japan in the 1980s, the Dot.com bubble of the ’90s, our current housing market – or even a gravity propelled roller coaster – then you know the slow climb of Phase I deserves to be the scariest for the worst is yet to be.
If what you are doing is working well you might convince yourself that you don’t need to learn anything new or do anything differently. You might be seduced into believing that it is wise to mortgage your future for an even more wonderful present. Fact is; these are the best times to save for bad times.
Eventually a hill will be crested that leaves nothing but a cliff in sight and if there is another hill in the distance the fog will be too thick too make it out. Phase II has begun.
During these times people have no trouble feeling fear and remorse but those feelings do them no good. If you’ve lost a job, you might conclude that no equivalent one exists to replace it, and you might be correct. People will switch from mortgaging their future to scrimping to make ends meet. Since no investment seems to pay a return, they stop investing and since nothing they do seems to work, they stop doing anything. These are symptoms of depression, both economic and emotional.
Eventually there comes a time when your investments do begin to pay off and success does depend on what you do. This is the beginning of Phase III.
How well your investments perform in Phase III depends on what you invested in during Phase II. You might object that during Phase II many people no longer have resources to invest. But, they have clear title to a brain and they own their own time. If nothing you do pays a current dividend then there is no opportunity cost to investing effort and time honing old skills and learning new ones.
The degree to which your efforts pay off depends on what you are capable of doing. What you are capable of doing in Phase III depends on what you were doing during Phase II.
Consider my grandmother. Homes didn’t begin moving until the economy turned around, but when it did, she had mastered her craft, she had the prospects and she was on the job.
Opportunities didn’t open up for my Granddad until the environment improved, but when it did, he was there in the office with needed skills while others were still waiting things out.
If, during Phase I, you avoid having too high an opinion of yourself or too much confidence in the future but instead continue to evolve your skills and save for Phase II, then you will be better able to weather and adapt to hard times.
If, during Phase II, you continue to invest in yourself and work for the benefit of others even though your efforts are not immediately rewarded, then you will be in the best position to prosper when Phase III inevitably begins.
If you follow, believe in and espouse this Three Phase Theory, then:
During Phase I you will have been labeled a contrarian and a pessimist.
During Phase II you will have been thought a fool for working so hard without reward.
However, during Phase III, when prosperity seems to shine on you before others, you will be heralded as a genius and visionary.
It is what you do when it seems that nothing matters that determines your success later when you discover that it does.
 The graph depicts four indices for six years on either side of a peak. They are: Blue – Dow Jones Industrial Average (center: September, 1929), Yellow – Japanese Nikkei 225 Stock Index (Center: December, 1989), Green – Nasdaq 100 Stock Index (Center: March, 2000), and S&P/Case-Shiller Home Price index for Miami (center: May, 2006… ending November, 2007)