God is a Capitalist

Monday, September 2, 2013

What is ABCT Investing?

Almost everyone has a blog today, so why would I bother to add my teaspoon to the deluge? I did so because I found a hole in conventional investing wisdom which I think needs plugging. I’m not the little Dutch boy who stuck his finger in the hole in the dam and saved the village below. But I think I have a perspective on investing that few others share and which could help people rescue their nest eggs from tragedy.

I earned an MA in economics from the University of Oklahoma many decades ago. As part of the curriculum I studied conventional investing wisdom which tells investors to buy-and-hold then grin-and-bear-it when crashes happen. Academics feed the conventional wisdom beast, and they understood that the gyrations of the stock and bond markets tie closely to the business cycle: stock market indices rise during expansions and collapse during recessions; bonds tend to do the opposite. If they could predict business cycles then they would have a good chance at predicting the markets. But after WWII academics issued the dictate that no one can predict markets. They based that partially on the idea that business cycles are random events which can’t be predicted.  Mainstream econ’s business cycle theory became @#$% happens!

However, a few years ago I began learning a theory of business cycles that was new to me. It’s popularly known as the Austrian business cycle theory, or ABCT. Economists over the past two and a half centuries have refined the theory since Richard Cantillon first discussed the basics in the 1720’s. At one point they knew it as the Manchester (England) theory and later as the monetary theory of business cycles. It got the name “Austrian” because the chief proponents in the late 19th and early 20th centuries were from Vienna. The most famous was Friedrich Hayek who won the Nobel Prize in 1974 and wrote the classic “Road to Serfdom.”

The role that profits play in Hayek’s version of the theory helped me connect it to the stock market. A very simplified version states that high profits for the cycle indicate an approaching cycle top. Profits also determine stock market cycles. I saw that the Austrian business cycle and monetary theories could be useful tools for guiding investment in stock and bond markets.
I explain in detail the business cycle theory and how it relates to investing in a little book I titled “Financial Bull Riding,” which a well-known publisher is considering offering as an E-book. When it’s available I’ll put the link to it on this site. I’ll use this site to apply some of the principles of Austrian economics to investing and discuss other things I have learned about investing.


Wil Ferrell said...

Sounds like a worthy venture. Austrians came a lot closer than anyone to predicting the Dotcom and Housing busts, but timing seems incredibly challenging from my point of view.

Roger McKinney said...

Yes, timing is always a big problem! Thanks!